Photo by Vitali Adutskevich
If you’re planning on parking a new car with a big red bow in your driveway this Christmas, the latest tax reform bill could have an added present for you if you got loan to buy the vehicle.
The One Big Beautiful Bill Act (OBBBA) will let qualifying buyers write off up to $10,000 in interest on that new car, as long as the purchase and financing meet certain conditions.
Here’s look at how the new deduction will work.
Temporary tax break: First, there’s the timing, a perennial tax consideration. The car loan interest deduction is temporary.
It’s in effect just for tax years 2025 through 2028.
So, you don’t have to rush to buy your new vehicle by Dec. 31. Plus, you probably won’t pay much if any on a car loan approved this late in the year.
But if you already purchased a car thanks to a loan that originated any time in 2025, you should check out the deduction’s specifics to ensure you can claim the interest deduction when you file your return next year.
Applies only to new personal-use vehicles: The loan interest deduction applies only to payments for new vehicles, not pre-owned ones.
The new car also must be for personal use, not business.
But the tax write-off isn’t limited to cars. Minivans, vans, SUVs, pickup trucks, and motorcycles, as long as the vehicle weighs less than 14,000 pounds, also qualify.
Don’t push (or pull) things, though. The Internal Revenue Service says ATVs, trailers, and campers are on the no-deduction list, along with used vehicles and those assembled abroad.
Vehicle assembly site is key: Yes, the location where your new vehicle was finalized is a key component of the new loan interest tax break. The vehicle must meet a final assembly in the United States requirement.
This rule, say car experts, will likely invalidate loans for popular imported autos.
To find out where your new ride was put together, check out the vehicle information label attached to each vehicle.
Quick digression. Many years ago, when the hubby and I traded in my Volkswagen for a larger Chevrolet sedan that was more comfortable for my 6’ 2” better half, the salesman made a big deal of us getting back in an American car. Except when we got home and checked the paperwork, we learned our new Chevy came from a GM plant in Ontario, Canada.
So, if the interest deduction is why you are buying, check this before you drive off the lot.
If you can’t find the assembly information in your new car’s material, the IRS notes that you may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) to determine whether its final assembly was in the United States. The National Highway Traffic Safety Administration’s VIN Decoder website provides plant of manufacture information.
Deduction’s dollar limitations: In addition to the $10,000 maximum annual deduction of interest paid on your new car loan, your income also comes into play. If you make what the new law considers too much, your deduction amount will be phased out.
The trigger point is modified adjusted gross income (MAGI, which also works this holiday season) of $100,000 for single filers, and $200,000 for married couples who file a joint return.
If your MAGI as a single taxpayer is more than $120,000 or exceeds $240,000 if you file jointly with your spouse, then you don’t get any loan interest deduction.
No itemizing necessary: Finally, there is good news for taxpayers who claim the standard deduction, which is most filers. You don’t have to itemize to claim the deduction.
The new car loan interest deduction is an above-the-line tax break. That makes it available to all eligible filers regardless of whether they take the standard deduction or list their deductible expenses on Schedule A.
The auto loan interest deduction will be claimed next filing season, and the subsequent years for which it is in place, on the new IRS form Schedule 1-A. It will be filed with your Form 1040, and it also covers other OBBBA temporary tax breaks that took effect in 2025.
Your lender must provide you with a statement showing the total amount of interest paid on the qualified vehicle loan during 2025. It is required to be available to you by Jan. 31, 2026. Note, too, that you’ll have to include your new vehicle’s VIN to claim the loan interest deduction.
Tax breaks are just part of the calculation: Finally, don’t buy a car just for a tax break. Taxes are just one part of your financial life.
Depending on your personal money and tax situation, it’s possible that the interest deduction won’t make much of a dent in all the other associated costs of owning a vehicle.
But if you do need a replacement vehicle, and you can get a good deal from the dealership and your lender, then by all means, look into a new set of wheels.
And definitely claim the loan interest tax deduction if you qualify.
