A major tax revision known as the One Big Beautiful Bill Act introduced a new no tax on car loan interest provision for individual tax filers for tax years 2025 through 2028. Under the new law, up to $10,000 in interest on a qualifying new auto loan can be deducted, even if you take the standard deduction. This change is designed to ease the cost of car ownership while encouraging the purchase of U.S.-assembled vehicles.
Who qualifies for the car loan interest tax deduction?
To benefit from the Big Beautiful Bill car loan interest deduction, you must meet the following criteria:
- The loan must be for a new vehicle purchased after December 31, 2024
- The vehicle must be intended for personal use, not business use, and secured by a lien on the vehicle
- You must be the first owner of the vehicle
- The vehicle must have its final assembly in the United States
Used vehicles, leases, and cars assembled outside the U.S. do not qualify.
How the no tax on car loan interest deduction works
This deduction is considered an above-the-line deduction, meaning you can subtract the interest paid from your adjusted gross income whether or not you itemize. The maximum deduction is $10,000 per year in qualified interest. If you pay less than that in interest, you simply deduct the actual amount paid.
Income limits for the car loan interest deduction
The full deduction is available to individuals with a modified adjusted gross income of up to $100,000 for single filers or $200,000 for married couples filing jointly. The deduction begins to phase out above those thresholds. For every $1,000 over the limit, the deduction is reduced by $200. High-income earners may see a significantly reduced or eliminated benefit.
Estimated tax savings for car loan interest
While the deduction allows up to $10,000, most taxpayers won’t pay that much in auto loan interest annually. Based on current loan rates and terms, average savings are expected to range between $400 and $500 per year. Actual savings will depend on your tax bracket and the size and terms of your car loan.
Can you combine the car loan interest deduction with EV tax credits?
If you purchase a qualifying electric vehicle before the federal EV tax credit expires in September 2025, you may be able to claim both the credit and the car loan interest deduction. The EV credit directly reduces your tax liability, while the car loan deduction reduces your taxable income. This combination could lead to significant savings if timed correctly.
How to claim the car loan interest deduction
If you plan to purchase a new U.S.-assembled car with a loan during the 2025 to 2028 tax years, request documentation of the vehicle’s final assembly location from the dealer or manufacturer. At tax time, use your loan documents to verify interest paid and claim the deduction as an income adjustment on your federal return. No special forms beyond the usual documentation appear to be required now.
When does the car loan interest deduction expire>
The no tax on car loan interest provision is scheduled to expire after the tax year 2028. If you refinance the loan or sell the vehicle, you may become ineligible for continued deductions. Unless Congress acts to extend the law, this tax break will be available for a limited time.
Key takeaways for individual taxpayers
For those planning to buy a new U.S.-assembled vehicle with financing between 2025 and 2028, the Big Beautiful Bill car loan interest deduction can lower your taxable income by up to $10,000 per year. If your income is under the phase-out limits and you meet the eligibility criteria, this deduction offers a new way to save even if you take the standard deduction. Be sure to retain proper documentation and confirm your vehicle meets the assembly requirements.
This deduction is just one part of the One Big Beautiful Bill Act, which also includes provisions for overtime pay, tip income, and retirement tax breaks. But for everyday car buyers, the ability to deduct car loan interest offers a new opportunity to reduce taxes and increase savings at tax time.
To Learn More About The Big Beautiful Bill, read about these other Tax Law changes:
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