Some Drivers Can Now Claim a Tax Deduction on Car Loan Interest. Here’s How It Works

The policy, signed into law in July 2025 in the One Big Beautiful Bill Act, comes with significant eligibility restrictions and conditions.

Drivers who purchased vehicles after Dec. 31, 2024, may now be eligible to claim the new car loan interest deduction, a key piece of the GOP tax law signed last year.

The deduction allows qualifying car owners to deduct up to $10,000 per year in interest payments from their taxable income, potentially saving hundreds of dollars. The car loan interest deduction is supposed to “stimulate massive domestic auto production” and make new cars more affordable for working Americans, as President Donald Trump said when he announced the idea in the final month of his 2024 campaign.

The final version, signed into law in July 2025 in the One Big Beautiful Bill Act, comes with significant eligibility restrictions and conditions. Don’t expect to qualify if you are a high-six-figure earner driving a foreign sports car.

But middle-income owners of new vehicles assembled in the U.S. will benefit, and administration officials are trying to rev up excitement about the deduction this tax season as part of a broader celebration of what could be a record year for refunds.

“For millions of Americans, a car isn’t a luxury, it’s how you get to work, school, and childcare,” Treasury Secretary Scott Bessent wrote in a recent post on X. “This deduction helps lower monthly costs.”

Need to file your taxes? See how you can maximize your refund this year with TurboTax.

How to claim the car loan interest deduction

To claim the car loan interest deduction, eligible car owners will need to complete a tax form for deductions created by the new tax law. The savings will ultimately come back to you in the form of an increased tax refund (or a smaller tax bill if you owe the IRS).

In December, the IRS released guidance on claiming the car loan interest deduction for the 2025 tax year. The agency advised lenders that they did not have to use a new tax form this season in order to help folks claim the deduction. Still, lenders were required to produce statements by the end of January detailing qualified interest paid by their borrowers in 2025.

According to Kelley Blue Book, this interest statement and the vehicle identification number (VIN) are the two main items needed to prepare a Schedule 1-A form, also known as the “additional deductions” form, with your tax return. This tax form also covers “no tax on tips” and “no tax on overtime” deductions, as well as the “senior bonus.”

The new car loan interest deduction is available to itemizers and non-itemizers, meaning you can claim the standard deduction and the auto interest deduction on the same tax return.

The deduction only applies to interest, not the principal, on your loan, and an analysis by Cox Automotive shows that a car would need to cost at least $130,000 for the owner to be able to deduct the full $10,000 amount.

Who qualifies for the car loan interest deduction?

The car loan interest deduction phases out for incomes above $100,000 for single filers and double that amount ($200,000) for joint filers.

For single filers, the deduction is reduced by $200 for every $1,000 of modified adjusted gross income, or MAGI, over the $100,000 mark. That means the deduction is unavailable for a single filer whose income exceeds $150,000.

With the current price of the average new vehicle just above $49,000, the new vehicle market is skewed toward higher earners. Most new car buyers simply earn too much to qualify for this deduction due to the income cutoff. (There is no used car tax deduction, and new vehicles that are leased do not qualify for this tax benefit, either.)

Officials say the deduction is designed to support American auto jobs. To qualify, the final assembly of the vehicle must have been in the U.S. According to IRS guidance, “the final assembly point is listed on the vehicle information label attached to each vehicle on a dealer’s premise.”

The information can also be looked up using the National Highway Traffic Safety Administration’s VIN Decoder.

The deduction is in place through tax year 2028, leading Kelley Blue Book to suggest that shoppers in the market for a new car incorporate the U.S. assembly mandate into their research.

Other rules: The vehicle loan must have an origination date after Dec. 31, 2024; the car must be a passenger vehicle under 14,000 pounds; and the car must be used for personal use at least 50% of the time.

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