By Cyrus W. Dereu CFP®, AIF®, Associate Wealth Advisor
The 2025 tax year brought the advent of the car loan interest deduction, introduced via the One Big Beautiful Bill. If you meet the requirements, you can now deduct qualified interest on car loans, up to a limit of $10k.
Key Takeaways
- The deduction applies only to qualifying new vehicles. Used vehicles and cars purchased before 2025 are not eligible.
- Income limits determine eligibility. Phaseouts begin at specific MAGI thresholds for single and joint filers.
- The deduction requires itemizing. Taxpayers must itemize deductions rather than take the standard deduction to benefit.
Is car loan interest tax deductible?
In certain cases, yes. The deduction is available on up to $10,000 of car loan interest paid per year, for tax years 2025-2028. In those years, your opportunity to deduct depends on your Modified Adjusted Gross Income (MAGI): phase outs exist at $100-150k of MAGI for single filers and $200-250k of MAGI for those married filing jointly.
Are all cars eligible to deduct car loan interest?
Unfortunately not. Rules require that:
- The loan must be on a new car, purchased after 2024.
Used cars purchased at any point, or new cars purchased before 2025, are ineligible to receive a loan interest deduction.
2. The vehicle must be expected to be used for personal matters more than 50% of the time.
A vehicle can be used for business purposes and still receive the loan interest deduction, as long as the vehicle’s expected primary use is personal.
3. Vehicles must have a Gross Vehicle Weight Rating (GVWR) of less than 14,000 pounds.
Most non-commercial sedans, SUVs, and pickup trucks will pass this test, but heavy-duty vehicles likely won’t.
4. Final assembly of the vehicle must be performed in the U.S.
Other manufacturing or assembly services may be done overseas, but the final steps are required to be completed in the U.S.
We recommend using the National Highway Traffic Safety Administration’s VIN Decoder resource, which, upon input of a VIN, will report where the car assembly was completed.
5. Eligible vehicles must have at least two wheels and be designed for use on public roadways.
This generally excludes machinery like tractors, golf carts, and ATVs.
How is the car loan interest deduction claimed?
If you and your vehicle meet all requirements, the interest paid on the car loan (up to the $10,000 limit) will be deducted on your Schedule 1-A. The car loan interest deduction is below-the-line, meaning that the deduction is taken after your Adjusted Gross Income is calculated, and before arriving at final taxable income. Below-the-line deductions are taken in the form of either the standard deduction or itemized deductions.
The car loan interest deduction is itemized—you need to itemize deductions in order to take advantage of this. Other itemized deductions include things like charitable gifts, state and local tax payments, and medical expenses above a certain threshold.
Check in with your tax advisor before making any big moves
If you qualify, the new Big Beautiful Bill’s car loan interest deduction presents an opportunity to pare down your tax bill, whether you bought a new car since the beginning of 2025—or are planning to purchase a new vehicle in the near future. But before heading to your favorite dealership, you might want to consult with your tax advisor to ensure that you qualify and that taking this deduction fits into your overall tax picture.
If you’d like to talk through any of the details of this bill with your advisory team here at HH, please give us a call.
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