How the Big Beautiful Bill Brings a New Car Loan Interest Deduction for 2025–2028

By Tax&Facts | Published on Feb 4, 2025 | Read: 3 Mins

A major new tax provision is set to benefit taxpayers purchasing new vehicles. Effective for tax years 2025 through 2028, qualifying taxpayers can deduct up to $10,000 per year in interest paid on loans for new, qualifying vehicles. This deduction can help reduce the overall cost of vehicle ownership and provides a meaningful incentive for new car purchases.

What Is the Car Loan Interest Deduction?

The car loan interest deduction allows taxpayers to subtract a portion of their car loan interest from their taxable income, up to $10,000 per year. Unlike a tax credit, which directly reduces taxes owed, this deduction lowers your taxable income, potentially reducing your overall tax liability.

Qualifying Vehicles

To be eligible for the deduction, the vehicle must meet certain requirements:

• Newly purchased: Used vehicles are not eligible.
• Personal use only: Vehicles purchased primarily for personal use, rather than commercial purposes, qualify.
• Weight limit: Typically applies to vehicles under 14,000 pounds, including cars, SUVs, trucks, and vans.
• Loan secured by the vehicle: The deduction applies only to interest paid on loans that are directly tied to the purchase of the qualifying vehicle

Qualifying Income and Phase-Out

The deduction is subject to income limits, ensuring that it benefits moderate- and middle-income taxpayers:

• Single taxpayers can claim the full deduction if their modified adjusted gross income (MAGI) is $100,000 or less.
• Married couples filing jointly can claim the full deduction if their MAGI is $200,000 or less.

For taxpayers whose income exceeds these thresholds, the deduction is gradually reduced: for every $1,000 (or portion thereof) above the threshold, the deductible amount is reduced by $200. The deduction is fully phased out at approximately $150,000 for single filers and $250,000 for joint filers.

Example: A single taxpayer with a MAGI of $115,000 is $15,000 above the income threshold. The deduction would be reduced by $15,000 ÷ $1,000 × $200 = $3,000. If this taxpayer paid $4,000 in loan interest, only $1,000 would be deductible.

How to Claim the Deduction

To take advantage of the car loan interest deduction:

1. Keep detailed records Retain loan statements, payment receipts, and bank records showing interest paid for each tax year.
2. Verify vehicle eligibility Confirm the vehicle is new, used for personal purposes, within the weight limit, and that the loan is secured by the vehicle.
3. Report the deduction Claim the deduction on your federal tax return. Follow IRS instructions on where to report this interest deduction even if you typically don’t itemize.

Why This Matters

The deduction provides meaningful tax relief for taxpayers purchasing new vehicles and encourages responsible borrowing. By lowering taxable income, it can reduce the overall cost of a new car. However, higher-income taxpayers may see a reduced benefit due to the phase-out rules.

For anyone planning to purchase a new vehicle between 2025 and 2028, understanding this deduction and how it applies to your income can provide significant tax savings. Careful planning and proper documentation are key to maximizing the benefit.