New Auto Loan Interest Deduction: Up to $10,000 Tax Break for Vehicle Purchases

If you’ve been thinking about buying a new car, here’s something from the new tax law that might affect your timing. The One Big Beautiful Bill Act created a deduction for auto loan interest that could save you a few hundred dollars in taxes each year – but there are specific rules you need to follow.

Let me walk you through how this works, because the details actually matter quite a bit.

What This New Deduction Actually Covers

Starting with purchases made after December 31, 2024, you can now deduct qualifying auto loan interest on your personal vehicle purchases. The deduction is capped at $10,000 per year, though most people will deduct far less since typical car loans generate $1,500 to $3,500 in annual interest. This isn’t an itemized deduction – it reduces your taxable income directly, which means you can take advantage of it even if you use the standard deduction.

For most people, this means actual tax savings of a few hundred dollars annually. That’s real money back in your pocket.

Here’s the catch: this benefit only lasts through 2028. You’ve got a four-year window, and then it’s gone. If you’re planning a vehicle purchase anyway, timing could matter.

The deduction applies to interest paid on loans secured by a first lien on the vehicle. This covers traditional auto loans from banks, credit unions, and dealer financing – but it doesn’t include leases or unsecured personal loans used to buy a car.

The Vehicle Requirements Are More Specific Than You Think

Not every vehicle purchase qualifies. Here’s what your vehicle needs to meet:

US Assembly Required: The vehicle’s final assembly must have occurred within the United States. This isn’t just about the brand – a Honda assembled in Ohio qualifies, while the same model assembled in Japan doesn’t.

New Vehicle Only: The original use must commence with you. No used cars, no matter how recent the model year. You must be the first owner.

Standard Consumer Vehicles: It must be a car, minivan, van, SUV, pickup truck, or motorcycle designed for use on public streets and highways with a gross vehicle weight rating under 14,000 pounds. Most consumer vehicles easily meet this weight requirement.

One thing that catches people: you’ll need to include the VIN on your tax return to claim this deduction.

Income Limits Can Reduce or Eliminate Your Benefit

Like most tax benefits, this one phases out as your income increases. The phase-out starts at $100,000 for single filers and $200,000 for married couples filing jointly.

Here’s how the phase-out works: for every $1,000 your income exceeds these thresholds, your deduction gets reduced by $200. So if you’re single with $105,000 in income, your $10,000 deduction becomes $9,000. At $150,000 in income, the deduction disappears entirely.

For married couples, the math works the same way starting at $200,000. Hit $250,000 in combined income, and you lose the entire benefit.

Modified adjusted gross income includes your regular AGI plus any foreign earned income exclusions. For most people, it’s simply their adjusted gross income from their tax return.

The Married Filing Separately Advantage

Here’s something interesting: married couples don’t have to file jointly to claim this deduction. Each spouse can claim up to $10,000 on separate returns, potentially doubling the benefit to $20,000 total.

This could be particularly valuable for couples where one spouse has significantly lower income. If you’re married with combined income of $220,000, filing jointly might reduce your deduction. But if one spouse has $80,000 income and the other has $140,000, filing separately could preserve more of the deduction for the lower-income spouse.

The math gets complicated when you consider other tax implications of filing separately. But for couples with the right income split, this could mean meaningful additional savings.

If you already have a car loan that you took out before 2025, you might still benefit through refinancing. Refinancing loans qualify for the deduction, provided the new loan amount doesn’t exceed the original loan balance. So if you owe $20,000 on your 2023 car loan, you can refinance that amount and start claiming the interest deduction.

However, there’s an important limitation: loans from related parties don’t qualify. The tax code defines related parties pretty broadly – this includes family members, certain business relationships, and entities you control. So borrowing from your brother or your business to buy a car won’t qualify for this deduction.

Reporting Requirements and Information Returns

If you pay $600 or more in qualifying auto loan interest during the tax year, your lender must provide you with an information return reporting that interest. This is similar to how mortgage interest gets reported on Form 1098.

This reporting requirement helps ensure you have the documentation needed to claim the deduction, but it also means the IRS will have records of these payments. Make sure your deduction claims match the information returns you receive.

Real-World Examples of How This Works

Here’s how this looks in real situations:

Example 1: Sarah, a single teacher earning $70,000 annually, finances a new Honda Civic assembled in Ohio for $28,000. Her auto loan interest for the year is $1,400. Since her income is below the phase-out threshold and her vehicle meets all requirements, she can deduct the full $1,400. In her 22% tax bracket, this saves her about $308 in federal taxes.

Example 2: Mike and Jennifer file jointly with $180,000 in combined income. They finance a new Ford F-150 assembled in Michigan, paying $3,200 in interest during the year. Their income is below the $200,000 phase-out threshold, so they can deduct the full $3,200, saving them roughly $770 in their 24% tax bracket.

Example 3: David, a high earner with $120,000 income, finances a new BMW assembled in South Carolina. His loan interest totals $2,800 for the year. Since his income exceeds the $100,000 threshold by $20,000, his deduction gets reduced by $4,000 (20 × $200). He can deduct $6,000 instead of the full $10,000, but his actual interest paid is only $2,800, so he deducts the full amount and saves about $672 in taxes.

Strategic Timing Considerations

Since this deduction expires after 2028, timing matters if you’re already planning vehicle purchases.

If you’re planning multiple vehicle purchases – maybe replacing two family cars over the next few years – remember that you can deduct the interest on multiple qualifying loans simultaneously, up to the $10,000 annual limit per person.

For couples near the income thresholds, timing other income items might help preserve more of this deduction. This could include timing retirement withdrawals, Roth conversions, or other discretionary income items.

The temporary nature also means considering whether to move up a planned purchase. If you were thinking about buying a new car in 2029, moving that to 2028 could save you money.

State Tax Treatment Remains Unclear

Here’s something important to keep in mind: we don’t yet know how individual states will handle this new federal deduction. States typically fall into one of several categories when dealing with new federal tax provisions:

States That Conform: Some states automatically adopt federal tax changes, meaning you’d likely get a state tax benefit too. This could increase your total tax savings beyond the federal amounts discussed here.

States That Don’t Conform: Other states may choose not to recognize this deduction for state tax purposes, meaning you’d only get the federal benefit.

States With No Income Tax: If you live in a state without income tax (like Texas, Florida, Tennessee, or South Dakota), this uncertainty doesn’t affect you – you’re only dealing with the federal benefit anyway.

The challenge is that many states haven’t yet announced their positions on this new deduction. Some may wait to see how the federal implementation goes before making decisions. Others might address it in their next legislative sessions.

This uncertainty means your actual tax savings could be higher or lower than the federal-only calculations shown in this article, depending on where you live and what your state decides to do.

If you’re in a high-tax state and considering a vehicle purchase, it’s worth checking with a local tax professional about your state’s likely approach. The additional state tax savings could make the timing even more attractive, while a state that doesn’t conform might affect your planning calculations.

When Professional Guidance Makes Sense

This deduction can interact with other parts of your tax situation in ways that aren’t immediately obvious. Professional help makes sense if you’re dealing with:

Income Near Thresholds: If you’re single with income between $95,000 and $120,000, or married with income between $190,000 and $230,000, small planning moves might preserve more of this benefit.

Business Vehicle Use: If you use your personal vehicle for business, the interaction between this deduction and business mileage deductions requires careful planning to maximize your overall benefit.

Multiple Vehicle Purchases: Families buying multiple vehicles need to consider timing and ownership structures to optimize the total benefit.

Married Filing Status Decisions: The separate return strategy requires analyzing your complete tax situation, not just this one deduction.

What You Should Do Right Now

If you’re already planning a vehicle purchase in the next few years, here’s how to make sure you don’t miss out on this tax benefit:

Research Vehicle Assembly First: Before you shop, understand which models in your preferred category are assembled in the United States. This information is available from manufacturers and should be a factor when choosing between otherwise similar vehicles. The tax savings might be enough to tip the scales toward the US-assembled option.

Consider Your Timeline: If you’re planning a purchase anyway, remember that this benefit only lasts through 2028. This isn’t a reason to buy a car you don’t need, but if you were already planning to replace a vehicle, the timing might matter for maximizing your tax benefit.

Plan for Documentation: Make sure you understand what paperwork you’ll need. Keep loan documents, payment records, and vehicle information organized. You’ll need the VIN on your tax return.

Evaluate Financing Options: Since only first-lien secured loans qualify, make sure your financing structure takes advantage of this benefit. Avoid personal loans or other financing that doesn’t secure the vehicle.

The Bottom Line

This new auto loan interest deduction represents a genuine opportunity for tax savings on a major purchase most families make periodically anyway. For qualifying purchases, it’s essentially a bonus – typically a few hundred dollars in annual tax savings for four years.

The key is understanding the requirements upfront, especially if you’re already planning a vehicle purchase. The vehicle must be new, assembled in the United States, and meet specific criteria. Your loan must be secured by the vehicle, and your income must stay within the phase-out ranges.

This isn’t a large enough benefit to justify buying a car you don’t need or weren’t planning to purchase. But if you’re already in the market for a new vehicle, making sure it qualifies for this deduction is worth the effort.

The bottom line: if you’re buying a new car anyway, choose one assembled in the USA if possible. The tax savings won’t change your life, but they’ll help offset some of the cost of a purchase you were making regardless.

If you’re buying a new car anyway, it’s worth understanding these rules to make sure you don’t miss out on the tax benefit.

This information is general in nature and hasn’t been customized for your specific situation. Auto loan interest deduction rules involve complex requirements around vehicle specifications, loan structures, and income calculations. For personalized advice about your specific vehicle purchase and tax situation, please schedule a consultation with our team.