Car Loan Interest Deduction 2025–2028: What Qualifies Under the One Big Beautiful Bill
This article is part of Reinspired Books’ One Big Beautiful Bill Series — breaking down new federal deductions for 2025–2028.
You can also read:
Each deduction is claimed when you file your tax return, not through payroll.
Overview
The One Big Beautiful Bill introduces a new above-the-line deduction for interest paid on qualified car loans, beginning with the 2025 tax year and lasting through 2028 (unless extended by Congress).
This deduction allows individuals who purchase and finance a qualifying personal-use vehicle to deduct a portion of their car loan interest — even if they take the standard deduction instead of itemizing.
It’s one of the more straightforward changes in the bill, but the qualifications are specific and exclude several common financing situations.
How It Works
- Maximum deduction: Up to $10,000 per year
- Who qualifies: Individual taxpayers financing a new, personal-use vehicle with a qualifying car loan
- Claimed on: Schedule 1-A (Part IV)
- Available whether or not you itemize
- Effective for: Tax years 2025–2028
- Expires: December 31, 2028 (unless extended)
The deduction applies to new car loans originated after December 31, 2024, for personal-use vehicles — not business or commercial vehicles.
What Qualifies
To qualify, the vehicle must meet the definition of an “applicable passenger vehicle” under the bill:
A qualifying vehicle includes:
- Cars, vans, minivans, SUVs, pickup trucks, or motorcycles (minimum two wheels)
- All-terrain vehicles (ATVs) designed for land use
- Trailers, campers, or RVs that provide temporary living quarters and are motorized or towable
The car loan must:
- Be new (originated after December 31, 2024)
- Be used specifically to purchase the qualifying vehicle
- Be secured by that vehicle
- Be for personal use only
Refinancing Does Not Qualify
The law explicitly limits the deduction to original purchase car loans.
Refinancing an existing car loan — even during 2025–2028 — does not qualify.
Only the first car loan used to buy a new vehicle counts. Refinancing, lease buyouts, or loans for used vehicles do not.
Exclusions
The following loans are not eligible for this deduction:
- Fleet sales or bulk vehicle purchases
- Personal cash loans secured by a previously purchased vehicle
- Loans for commercial or business-use vehicles
- Lease financing arrangements
- Loans for vehicles with salvage titles
- Loans for vehicles intended for scrap or parts
Income Limits (Phase-Outs)
The deduction phases out at higher income levels.
| Filing Status | Phase-Out Begins |
|---|---|
| Single / Head of Household / MFS | $100,000 MAGI |
| Married Filing Jointly | $200,000 MAGI |
The deduction is reduced by $200 for every $1,000 (or fraction thereof) that your Modified Adjusted Gross Income (MAGI) exceeds the threshold.
Example:
If a single filer has $110,000 in MAGI, their deduction would decrease by $2,000 ($200 × 10).
So a $10,000 maximum becomes $8,000.
Who May Benefit
- Individuals who finance a new, personal-use vehicle
- Middle-income earners buying family or commuter vehicles
This deduction may provide modest savings, especially as interest rates on auto loans remain elevated.
Who Does Not Qualify
- Buyers of used or salvaged vehicles
- Fleet or business-use vehicles
- Refinanced or leased vehicles
- Loans for scrap or parts-only vehicles
- Cash purchases (no interest = no deduction)
Filing Details
To claim the deduction:
- Report the total qualified interest paid on Schedule 1-A, Part IV of your Form 1040.
- Include the Vehicle Identification Number (VIN) of the qualifying vehicle.
- Keep copies of your loan agreement and interest statements.
Auto lenders will be required to file information returns with the IRS — similar to a Form 1098 for mortgage interest — and furnish statements to borrowers showing the total qualifying interest paid for the year.
Taxpayers can expect to receive this document annually, beginning with the 2025 tax year.
Example
Maria buys a new SUV in March 2025 for $42,000 and finances it with a loan at 7.5% interest. Over the year, she pays $2,700 in loan interest. Her MAGI is $95,000, so she qualifies for the full deduction.
If her MAGI were $110,000, she’d lose $2,000 to phase-out adjustments — leaving $700 deductible.
Key Takeaways
- Deduct up to $10,000 per year in qualified auto-loan interest.
- Applies whether or not you itemize.
- Applies only to new personal-use vehicles purchased with a qualifying loan.
- Refinancing, leasing, salvage, or fleet loans do not qualify.
- Auto lenders must issue annual statements (similar to Form 1098).
- Phases out starting at $100K (single/MFS) or $200K (joint).
- Deduction ends after 2028 unless extended by Congress.
What to Do Now
If you’re planning to buy a new car in 2025 or later:
- Confirm your loan is new and originated after December 31, 2024.
- Keep copies of loan contracts and lender statements.
- Avoid refinancing or leasing if your goal is to claim the deduction.
- Track your MAGI to see if you fall within the qualifying range.
Reinspired Books helps clients make informed tax decisions — from new deductions to financing strategy — with clarity and compliance.
Schedule your 2025 tax planning session at reinspiredbooks.com
Learn how the other One Big Beautiful Bill deductions compare:
Book your clarity session: reinspiredbooks.com
