The Scoop On Deducting Interest On Your Car Loan

A new federal law has cracked open the door for car buyers to deduct interest on auto loans for the first time in decades, but the benefit is narrowly targeted and comes with several strings attached. Tucked into the sweeping “One Big Beautiful Bill Act” signed into law on July 4, the car loan interest deduction is being positioned as consumer relief amid rising interest rates, vehicle price inflation, and new tariffs on imported vehicles and parts. But eligibility is far from universal, and the actual savings may be modest for many Americans.

Under the law, individuals can deduct up to $10,000 annually in interest paid on new auto loans from 2025 through 2028. But the benefit only applies to loans used to purchase new vehicles that were finally assembled in the United States, and the vehicle must be purchased—not leased—by a private individual. Commercial buyers, fleet operators, and lease customers are excluded entirely. The law also requires that the vehicle be titled in the taxpayer’s name and financed with a qualified auto loan that carries interest—not a zero-interest or promotional loan, which is increasingly common in dealer advertising.

The deduction phases out based on income. Single filers begin to lose eligibility once their adjusted gross income exceeds $100,000, with the deduction vanishing entirely at $150,000. For joint filers, the phaseout begins at $200,000 and ends at $250,000. The amount of the deduction is reduced by $200 for every $1,000 in income above the phaseout threshold. That means a married couple earning $240,000 annually would only be eligible to deduct $2,000 of interest, assuming they meet all other requirements. Anyone above $250,000 gets nothing.

Buyers must also itemize their deductions to take advantage of the new write-off. Those taking the standard deduction—roughly 90 percent of taxpayers in recent years—will see no benefit. And unlike business owners who can write off vehicle expenses under existing tax provisions, this deduction is purely for personal-use vehicles. Those using their vehicle for rideshare driving or delivery gigs may still qualify, but must allocate expenses and usage accordingly, which complicates the deduction even further.

The IRS will verify vehicle eligibility based on VIN records and final assembly location. That could create confusion, as many automakers produce nearly identical models in different countries. For example, a buyer may assume their midsize SUV is U.S.-built, but it could have been assembled in Mexico or Canada depending on the trim or production batch. Buyers will need to confirm U.S. final assembly before purchase if they intend to claim the deduction later, and later in this article, I give you an easy way to know where a car is made.

The law only applies to interest paid between January 1, 2025, and December 31, 2028. But guidance is still pending from the IRS about whether interest payments made in the second half of 2025—after the bill’s July 4 enactment—will count for the 2025 tax year, or whether the deduction kicks in fully on January 1, 2026. That ambiguity may affect tax planning for buyers financing vehicles this fall.

While billed as a win for American consumers and manufacturing, the new deduction may be undermined by broader market forces. New tariffs on imported vehicles and parts—also part of the broader economic agenda—are expected to drive up average vehicle prices, especially as time goes on.

Some critics also point out that the law doesn’t apply retroactively to loans originated in 2024 or earlier, even if interest is being paid in 2025 or beyond. That leaves many current vehicle owners and recent buyers with no relief despite facing the same economic conditions. Additionally, with interest rates still elevated, the $10,000 cap may not go far for buyers with longer-term or higher-interest loans, especially on full-size pickups, large SUVs, or electric vehicles where transaction prices regularly exceed $60,000.

Still, the deduction marks a rare shift in tax policy, which has traditionally treated car loan interest as a nondeductible personal expense since the Tax Reform Act of 1986. Lawmakers backing the measure say it’s a way to reward buyers who support U.S. jobs by purchasing domestically assembled vehicles, while softening the blow of trade policy changes designed to bring more manufacturing back home.

For taxpayers interested in claiming the deduction, careful planning is key. Buyers should request documentation of the vehicle’s final assembly point before signing, compare loan options carefully, and consult a tax professional to understand how the deduction interacts with other financial decisions. As with many temporary tax incentives, the deduction is scheduled to expire in 2028 unless extended by Congress.

Until then, it offers a narrow but potentially useful break—provided you’re buying the right vehicle, at the right time, with the right income and the right paperwork.

If you want to make sure you are getting a vehicle made in America, the very first number of the 17-digit VIN will tell you where a car was assembled.  If the vin starts with 1, 4, or 5 it was made in the United States.  Be careful, there are some cars that look identical that are made both inside and outside the U.S.  For instance, you could have a Corolla, Civic, Accord, CR-V, or Silverado sitting side-by-side on the lot and one was made in the United States and the one next to it outside our borders.