How to Take Advantage of the Car Loan Interest Deduction in the New Tax Bill
A guide to claiming up to $10,000 a year in car loan interest deductions under the Big Beautiful Bill.
July 11th, 2025
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Signed into law on July 4, 2025, the so-called “Big Beautiful Bill” comes with a gift for car buyers: a temporary tax deduction for car loan interest. Yes, you read that right, interest on your car loan can now reduce your tax bill.
If you're thinking about financing a new vehicle, this article will help you figure out whether you qualify, what kinds of cars and loans are eligible, and how to take advantage before the window closes. Let’s break it down-without breaking your budget.
The Bill
The One Big Beautiful Bill Act (OBBBA) was passed by the House on May 22, 2025, and signed by President Trump on July 4, 2025. The sweeping 1,000‑page reconciliation package permanently extends many 2017 tax cuts, increases standard deductions, and adds new deductions for tips, overtime pay, and-critically for our purposes-car loan interest.
The legislation is projected to cost roughly $4.5 trillion in revenue over ten years while slashing spending on social programs and clean energy. But for individual consumers, the car loan deduction may represent real annual savings.
What Is the Car Loan Interest Deduction?
Under the bill, borrowers can deduct up to $10,000 in interest paid annually on qualifying car loans from their taxable income. This “above the line” deduction applies whether or not you itemize, essentially reducing your adjusted gross income and lowering your tax bill directly.
This applies broadly to new passenger vehicles-including cars, trucks, SUVs, vans, and even motorcycles under 14,000 pounds-as long as they meet eligibility rules.
Who Qualifies for the Exemption?
Qualification hinges on income limits, loan dates, and the type of vehicle being financed. Let's check income limits first:
- • Individual filers with Modified Ajusted Gross Income (MAGI) up to $100,000 qualify for the full deduction.
- • Married couples filing jointly can have MAGI up to $200,000.
- • Above those levels, the deduction begins to phase out. For individuals, it is reduced by $200 for every $1,000 in modified adjusted gross income (MAGI) above $100,000, disappearing entirely at $149,000. For married couples filing jointly, the deduction is reduced by the same amount for each $1,000 above $200,000 and phases out completely at $249,000.
These thresholds ensure middle-class families receive the full benefit, while higher earners see reduced advantages. At the same time, lower-income filers with little or no federal tax liability may not benefit either, since the deduction only helps if you owe income tax in the first place.
Which Vehicles and Loans Can You Deduct?
To claim up to $10,000, your purchase must meet several criteria:
- • New, not used, and bought between January 1, 2025 and December 31, 2028.
- • Final assembly of the vehicle must occur in the United States. While it's not always obvious to buyers, the IRS may publish a qualifying vehicle list similar to those used for electric vehicle credits. Dealers may also advertise or certify eligible vehicles to help consumers know which models qualify for the deduction.
- • Only personal use vehicles count; commercial or business use vehicles are excluded.
- • Eligible models include passenger cars, SUVs, pickup trucks, minivans, and motorcycles under 14,000 lbs. They must have at least two wheels to qualify.
- • The loan must be a secured auto loan financed through a dealer, bank, or credit union. Loans from family or friends are not eligible. Leases and loans for vehicles intended for resale or dismantling also don’t qualify. Interest on a refinanced loan may be deductible, but only on the remaining principal at the time of refinancing—and only if the lender still holds the first lien on the vehicle.
How to Claim It
- Keep loan documents showing total interest paid in the year.
- On Form 1040, enter the deduction on the line for "adjustments to income" (above the line).
- No itemization is needed-this lowers your MAGI directly.
- If you're near income limits, consider maximizing retirement and HSA contributions to stay eligible.
- Keep vehicle purchase documentation proving U.S. final assembly and purchase date.
Be sure to retain the loan statement and manufacturer documents in case the IRS requests proof.
Example: How Much Could You Save?
Let’s say you take a $60,000 loan on a new SUV with a 6% interest rate over four years. Year one interest might total around $3,227. If you’re eligible, that full $3,227 is deducted-reducing your taxable income directly. If your are on the 22% tax bracket, that may net a saving of about $721 on your taxes
Do not forget the all-important final assembly requirement. Car buyers are more likely to benefit if the vehicle was assembled in the United States. While many American brands may qualify, what really matters is where the final assembly took place,so be sure to verify that before assuming your loan interest is deductible.
Partial Unofficial List Of Models Assembled in America
This is a partial list of models that may have final assembly in America. To qualify for the tax deduction, you must confirm that the specific vehicle you’re buying was indeed assembled in the U.S.
General Motors
Chevrolet Silverado GMC Sierra Corvette Cadillac Escalade Cadillac Escalade ESV GMC Hummer EVHonda
Accord Civic CR-V Odyssey Passport Pilot Ridgeline Acura TLX Acura Integra Acura MDX Acura RDX Acura ZDXHyundai and Kia
Hyundai Tucson Hyundai Santa Fe Hyundai Santa Cruz Hyundai Ioniq 5 Hyundai Ioniq 9 Genesis GV70 Kia K5 Kia Sportage Kia Telluride Kia EV9Mazda
CX-50
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