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.”
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
- your 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 jointly).
*When the loan is incurred, you must intend to use the vehicle for personal use more than 50% of the time.
The interest must be paid on a loan that:
- originates after December 31, 2024,
- is used to purchase a new vehicle, with the 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 can deduct up to $10,000 in interest payments each year. If your income is higher than the limit, your deduction will be lowered, or you may not get a deduction at all. Schedule 1-a will figure out how much your deduction goes down. If this amount is the same as or more than the interest you paid, you cannot deduct anything. If the reduction is less, you can still deduct some of your interest. For example, if your reduction is $4,000 and you paid $6,500 in interest, you can deduct $2,500.
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.