If you’ve bought a new vehicle recently (or you’re thinking about it), you may be pleasantly surprised to learn there’s a new tax deduction for car loan interest starting in 2025.

This new tax benefit can help lower your tax bill, even if you don’t itemize deductions. But there are some rules to keep in mind. In this article, we break down the car loan interest deduction in plain English so car buyers can write off the interest paid.

What Is the New Car Loan Interest Deduction?

Thanks to the One Big Beautiful Bill Act, taxpayers can now deduct up to $10,000 per year of interest paid on a specified passenger vehicle loan (SPVL).

A few important things to know right out of the gate:

• This deduction reduces taxable income, not adjusted gross income (AGI)
• You can deduct interest paid whether you itemize or claim the standard deduction
• It’s temporary, only available for tax years 2025 through 2028
• It’s for personal-use vehicles, not purely commercial ones

What Kind of Vehicle Qualifies?

Not every vehicle makes the cut. To qualify, the vehicle must meet several requirements:

• Final assembly occurred in the U.S. You can determine where final assembly occurred via the vehicle information label attached by the dealer or the vehicle’s plant of manufacture. Use the federal government’s VIN Decoder website to determine where the vehicle was manufactured.
• You are the first owner. Used vehicles don’t qualify.
• It’s designed for use on public roads. Industrial machines (forklifts, bulldozers), agricultural equipment (tractors, combines), and recreational vehicles (ATVs, dirt bikes, snowmobiles) are not eligible.
• It has at least two wheels. Boats and other watercraft don’t qualify.
• It’s a car, sport utility vehicle (SUV), pickup, van, minivan, or motorcycle.
• Its gross vehicle weight rating (GVWR) is less than 14,000 pounds.
• It’s for personal use more than 50% of the time. This is based on your intentions at the time of purchase. This allows for some business use, such as a part-time ride-share driver or a consultant who occasionally uses their personal vehicle to travel to client meetings.

What Kind of Loan Qualifies?

The loan itself also needs to meet some rules:

• You must take out the loan after December 31, 2024
• The loan must be secured by the vehicle (a first lien)
• It must be used to purchase the vehicle (lease payments don’t qualify)
• Refinanced loans can qualify, but only up to the original loan amount
• Loans from certain related parties don’t qualify

In short, a standard auto loan from a bank or dealer likely counts as a qualifying vehicle loan (QVL). But creative financing from a family member probably doesn’t.

How Much Can You Deduct?

Here’s where you might have to do a little math.

The maximum deduction is $10,000 per tax return, per year. This means married couples who both buy new vehicles within the applicable timeframe might benefit from filing separately. If they file jointly, their deduction is capped at $10,000, but if they file separately, they can claim $10,000 on each return, for a possible combined deduction of $20,000.

However, the deduction phases out as income increases. The allowable deduction is reduced by $200 for each $1,000 that the taxpayer’s modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 if married filing jointly). This means the loan interest deduction is completely gone once your MAGI reaches $150,000 ($250,000 if joint).

Allocating Business and Personal Use

If you use the vehicle for both personal and business purposes, you must allocate the interest between business interest (deducted under business rules) and personal interest (claimed under this new deduction).

You can’t double-dip, but you do have flexibility in how you split it, depending on what works best for your overall tax picture.

For example, say you paid $13,000 in interest on a car loan in 2025 and used the vehicle 25% for business use.

Assuming your MAGI is under the phase-out threshold, your options are:

• Deduct $10,000 of interest under the new auto loan interest deduction and the remaining $3,000 as business interest
• Deduct $3,250 as business interest and the remaining $9,750 as personal car loan interest

This flexibility gives you some wiggle room to meet specific AGI or qualified business income targets. It’s one of those areas where planning can make a real difference.

How to Claim the Car Loan Interest Deduction in Income Tax

To claim the deduction, you’ll need to provide the vehicle identification number (VIN) of the vehicle on your tax return. You’ll need to enter this number in Part IV of Schedule 1-A.

You’ll also need a record of how much interest you paid. Starting with tax year 2026 (returns filed in 2027), lenders will be required to report this interest on a new form, Form 1098-VLI. For 2025, lenders can provide the information through regular monthly statements, an online portal, or an annual statement.

Is The Car Loan Interest Deduction Worth It?

For many taxpayers, yes.

If you’re buying a qualifying vehicle anyway, this deduction can meaningfully reduce your tax bill. But income limits, vehicle eligibility, and business use all matter. This isn’t a “check the box and move on” deduction. It’s more of a “let’s look at the whole picture” opportunity.

Also, in the tax world, we have a saying: “Don’t let the tax tail wag the investment dog.” In other words, you should base your decision to buy a new vehicle on your need for one and your overall financial picture—not the desire for a tax deduction.

A tax deduction can be an important consideration when making financial decisions, but it’s not always the most important.

One More Reason to Plan Before You Buy

Tax law doesn’t usually hand out freebies without strings attached, and the auto loan interest deduction is no exception. But with a little planning (and the right vehicle purchase), this tax break can work in your favor.

If you’re considering buying a vehicle, refinancing an auto loan, or trying to understand how this fits into your broader tax strategy, it’s worth having the conversation before you head out to the dealership.

Reach out to NewWay Accounting for help evaluating your options. We’re happy to talk through how this deduction fits into your bigger financial picture.