My car is 13 years old. But it doesn’t have that many miles on it since I use it primarily to run local errands a couple times a week.
Best of all, I haven’t made a car payment in almost a decade.
So, I’ll be hanging on to the old Chevy Malibu for a while longer.
Not even the One Big Beautiful Bill’s (OBBB’s) tax deduction for an auto loan can tempt me to replace it.
Other drivers, however, might find the new tax break the incentive they’ve been waiting for to head to a dealership.
If that’s you, here’s what you need to know about the new tax deduction.
It’s temporary. It is only available for four years. You can claim it only on returns filed for tax years 2025 through 2028.
Still, if you’re looking to buy a car soon and need a loan to do so, it could help save you some money.
The emphasis here is on could. There are plenty of other requirements attached to the new tax break.
There are vehicular limits. While the tax break applies to cars, motorcycles, sport utility vehicles, minivans, vans, and pickup trucks weighing less than 14,000 pounds, the vehicles must be new.
You’ll get no tax break for interest on a loan to buy a used car or other eligible vehicle.
So, in some (many?) cases, the higher cost of a new vehicle could (probably will?) offset any tax break from the new loan interest deduction.
Also, the vehicle must be assembled in the United States. This requirement is part of the Trump administration’s efforts to increase production (of autos and myriad items) and jobs within the country’s borders.
And if you buy a vehicle to use in your business, the loan interest is not deductible. The tax break applies only to autos etc. purchased for personal use.
Deductible interest is capped at $10,000. The 10 grand limit on deductible vehicular loan interest shouldn’t be a problem for most of us.
The average driver paid $1,332 a year in loan interest charges on new cars bought in 2024, according to AAA. That’s a 6 percent increase from the previous year, and it could go higher if tariffs push up car prices, even on vehicles assembled here in the United States, but which use imported parts.
And, according to Institute on Taxation and Economic Policy (ITEP) analysis, the auto loan interest deduction would not offset tariff-related price increases for most buyers.
Still, if you’re planning to get a new car anyway, you’ll definitely want to look into any tax help the new deduction could provide.
So, you’ll want to shop around more than usual for the best loan deal. A tax deduction will only help at filing time. Your auto payments will be monthly.
In the first quarter of 2025, the overall average auto loan interest rate was 6.73 percent for new cars, according to NerdWallet. The personal finance website also notes that generally the better your credit score, the lower your loan rate.
People with credit scores above 780 have the best shot of getting the lowest interest rates (around 5 percent), while those with credit scores below 501 typically pay the highest interest rates (nearly 16 percent).
Your income could reduce your deduction. Single taxpayers can claim the full auto loan interest deduction only if they have a modified adjusted gross income (MAGI) of $100,000 or less. The income level for married couples tops out at MAGI of $200,000.
FYI, the ol’ blog’s tax glossary notes that MAGI is your adjusted gross income (AGI) plus some items that you were able to exclude for other reasons added back.
Once your MAGI exceeds the amount for your filing status, the auto loan interest tax deduction is reduced. The OBBB’s official math says it is cut by $200 for each $1,000 in income above those levels. Your tax preparer or software program will do the calculations for you.
The loan interest bottom line is that the deduction is completely phased out for single filers earning more than $150,000 and married jointly filing couples with incomes exceeding $250,000.
Loan interest savings will vary. To borrow the auto cliché, your tax savings from the new vehicle loan interest deduction may vary.
The amount will depend on the size of your auto loan, your interest rate, and your earnings. But generally, say financial gurus, most who qualify for this new tax deduction should be able to save hundreds.
If your good credit gets you a new car loan of 6.5 percent, you could deduct $3,000 in the first year of owning your new car, according to the American Financial Services Association. The consumer credit industry trade group notes that subsequent deductions will be smaller, around $1,800 per year after the loan’s initial year, since interest payments on all loans are front-loaded, with principal payments increasing as the loan ages.
That $3,000 tax deduction would translate, for example, to $660 in savings for a single filer in the 22 percent tax bracket.
You don’t have to itemize. The good news is that you won’t have to change your preferred filing method to claim the new auto loan interest deduction. It will be available to all eligible vehicle buyers, both those who itemize as well as those who claim the standard deduction.
You might want to go electric. Another possible auto-related tax saving is going electric. Qualifying electric vehicles (EVs), both new or used, could get you a tax credit.
The EV tax credit for a new electric ride is as much as $7,500. If you find a used EV to your liking, it could get you a tax credit of up to $4,000.
And a tax credit is better that a tax deduction.
A tax deduction reduces your income, which then lowers how much is subject to tax, and ultimately the size of your tax bill. See the earlier example of a $3,000 car loan interest deduction creating $660 in tax savings.
A tax credit, on the other hand, is a dollar-for-dollar offset of any tax you owe. If you qualify for the full $7,500 EV tax credit, it will directly reduce your tax liability. For example, the full EV credit will cut your $10,000 tax bill to $2,500.
But speed is of the essence here, and I’m not talking your vehicle’s top mile per hour range.
Where the OBBB added the car loan interest deduction, it’s also ending the EV tax credit, for both new and used vehicles, after Sept. 30. Yes, this coming Sept. 30. Just two and half months from now.
You also might find these items of interest:
- How your state pays for its roads
- Treasury issues $1B+ in point-of-sale clean vehicle tax credits
- Want an EV? Buy before Trump eliminates the tax credit on Sept. 30
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