Buying a new car just got a little more rewarding, at least when it comes to your taxes. For tax years 2025 through 2028, certain taxpayers will be able to deduct interest paid on qualifying car loans. Here’s what you need to know about this new deduction.
Amount allowed: Up to $10,000 in car loan interest may be deducted each year.
Above-the-line deduction: This deduction is taken “above the line,” meaning you can claim it whether you itemize deductions or take the standard deduction.
Not every car purchase will qualify. To be eligible, the vehicle must meet these criteria:
Must be purchased new (not used).
Can be a car, minivan, van, SUV, pickup truck, or motorcycle.
Must have a gross vehicle weight rating under 14,000 pounds.
Final assembly must have occurred in the United States.
Electric vehicles qualify if they meet the above requirements.
The loan must be incurred after 2024 and secured by a first lien on the vehicle.
The deduction begins to phase out at higher income levels:
Starts phasing out when modified adjusted gross income (MAGI) exceeds $100,000 for single filers or $200,000 for joint filers.
The phaseout reduces the deduction by $200 for every $1,000 (or fraction thereof) over the threshold.
For example, a single taxpayer with $150,000 in MAGI would not qualify for the deduction at all.
Similar to how mortgage interest is reported, lenders will issue a new IRS tax form showing the amount of car loan interest paid (if it totals $600 or more for the year). This form will also include information about the loan and the vehicle.
If you’re planning to buy a new car in the next few years, this temporary tax break could help offset borrowing costs. Just be sure the vehicle and loan meet the eligibility requirements, and keep an eye on your income level to see how much of the deduction you can claim.
Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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