Contributed by: KristineS, FreeTaxUSA Agent, Tax Pro
With the signing of the One Big Beautiful Bill Act into law, you may be wondering if your car loan interest is now deductible, or you may have heard there’s no tax to pay on car loan interest.
In this article we’ll cover all you need to know to see if you qualify for the car loan interest tax deduction.
According to the IRS, beginning in 2025 - 2028, taxpayers may start, “deducting interest paid on a loan used to purchase a qualified vehicle, provided the vehicle is purchased for personal use and meets other eligibility criteria.”
It’s particularly important for our FreeTaxUSA rideshare and delivery drivers to understand interest on a loan associated with their personal vehicle, which is used for both personal and business purposes, will be excluded from being eligible for a deduction.
What is a qualified vehicle?
A qualified vehicle must meet all of the following criteria:
- It must be new (used cars don’t qualify).
- The weight of the vehicle must be less than 14,000 pounds (this means most cars, trucks, SUVs, minivans and motorcycles sold in the United States).
- It must have at least two wheels, and
- The vehicle must have undergone final assembly in the United States.
You can tell where final assembly took place by reading the Vehicle Identification Number (VIN) of the vehicle. The first character in the VIN is the country code showing where your car was built or assembled. If the VIN starts with 1, 4, 5, or 7, final assembly was on American soil.
Who is eligible for the deduction?
You’re eligible for the deduction if:
- you purchase the vehicle for personal purposes,
- you itemize deductions on a Schedule A or not, and
- you’re Adjusted Gross Income (AGI) is less than $100,000. For car buyers with AGI greater than $100,000, a phase out range begins ($200,000 for married filing joint).
The interest must be paid on a loan that:
- originates after December 31, 2024,
- is used to purchase a new vehicle, with first use starting with the taxpayer,
- is for personal use only (no business or commercial use), and;
- is secured by the loan on the vehicle.
This deduction also applies to a later refinance for the same vehicle.
You may deduct up to $10,000 annually. You must include the VIN of the qualified vehicle on your tax return each year you claim the deduction.
The lender will be required to provide both you and the IRS with an information statement showing the total amount of interest received during the year.