Can You Deduct Car Loan Interest on Your Taxes? Here's What You Need to Know

If you're buying a new car and taking out a loan to pay for it, there's good news: you might be able to save money on your taxes.

Thanks to the One Big Beautiful Bill Act (OBBBA), some taxpayers can now deduct up to $10,000 in car loan interest on their federal tax return.

This tax break applies to cars purchased between 2025 and 2028. But not everyone qualifies—there are specific rules you'll need to follow.
 

Who Can Claim This Deduction?

To take advantage of this tax break, you, your car, and your loan must all meet certain requirements.
 

• Your Car Must:
  • Be brand new (used cars don't count, even if they're new to you)
  • Be assembled in the United States
  • Have its Vehicle Identification Number (VIN) included on your tax return
• Your Loan Must:
  • Be used specifically to purchase the qualifying vehicle
  • Be taken out between 2025 and 2028
  • Have interest payments made during the tax year you're claiming

 

Your Income Must Be Within Certain Limits:

The deduction starts to shrink if you earn too much money. If you're single, the deduction begins phasing out at $100,000 and disappears completely at $150,000.

If you're married and filing jointly, the phase-out starts at $200,000 and ends at $250,000.

If your income falls somewhere in the middle, you can still get a partial deduction.
 

How the Phase-Out Works: A Simple Example

Let's say you're a single filer and your income is $110,000. Since the phase-out starts at $100,000, you're $10,000 over the limit.

For every $1,000 you earn above the starting point, your deduction drops by $200. So:
 

• $10,000 over the limit ÷ $1,000 = 10
• 10 × $200 = $2,000 reduction

Instead of deducting the full $10,000, you'd be able to deduct $8,000.
 

When Can You Start Claiming This Deduction?

You can claim this deduction starting with your 2025 tax return, which you'll file in early 2026.

As long as you keep paying interest on a qualifying loan and meet all the requirements, you can claim this benefit every year through 2028.
 

How to Claim the Deduction: Step by Step

 

1. Gather your loan documents. You'll need information about your loan and the interest you paid. For 2025, you may need to request a statement from your lender. In future years, lenders will send you a form (similar to Form 1098) showing how much interest you paid.
2. Fill out Schedule 1-A, Part IV. Enter your loan details, including the car's VIN.
3. Submit Schedule 1-A with your Form 1040 when you file your tax return.

Good to know: You can claim this deduction whether you take the standard deduction or itemize your deductions.
 

What If You Use Your Car for Business?

If you're self-employed or use your car for work, you might already be deducting vehicle expenses. Here's how the new deduction fits in:
 

• Standard mileage method: You deduct a set amount per mile driven for business, plus a portion of your loan interest related to business use.
• Actual expense method: You deduct real costs like gas, maintenance, insurance, and depreciation (which includes loan interest). If you use this method, you'll need to subtract the business portion from the new OBBBA deduction to avoid counting it twice.

The new car loan interest deduction is separate from any business-related vehicle deductions.

-

Get the latest on auto loan relief and other tips by subscribing to our weekly newsletter here!