A new tax break is available this filing season for taxpayers who have car loans on vehicles that meet certain specifications.
The One Big Beautiful Bill Act (OBBBA), which was passed through Congress by Republicans using the reconciliation process and signed into law last year by President Donald Trump, included a provision allowing interest on car loans to be deducted under certain circumstances.
The IRS released guidance on the implementation of the “No Tax on Car Loan Interest” provision of the OBBBA, which applies for loans taken out to purchase new personal vehicles – not business or commercial vehicles – that were made in America after Dec. 31, 2024. Lease payments do not qualify.
Taxpayers whose auto loans qualify for the interest deduction may deduct up to $10,000 per year, and the deduction is available for both taxpayers who itemize their deductions and those who claim the standard deduction on their return.
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The deduction is subject to income requirements and phases out for higher-income taxpayers who have a modified adjusted gross income of over $100,000 for single filers or $200,000 for joint filers.
Like other tax deductions, the auto loan interest deduction reduces the taxpayer’s taxable income by the amount of interest payments they claimed up to the $10,000 annual limit, which means the actual tax savings will be smaller than the nominal size of the tax deduction.
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Under the OBBBA, the auto loan interest deduction is only applicable for vehicles that underwent final assembly in the U.S.
To confirm that a vehicle’s final assembly was in the U.S., taxpayers are instructed to check one of the following: the vehicle label at the dealership, the vehicle identification number (VIN) or the National Highway Traffic Safety Administration’s VIN Decoder – which can verify the vehicle’s final assembly location.
Taxpayers must include the vehicle’s VIN on their tax return for each year they claim the deduction.
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If a qualifying auto loan is later refinanced, the interest paid on the refinanced would generally be eligible for the deduction.
The deduction applies retroactively to the 2025 tax year, meaning it may be used for eligible auto loan interest payments incurred after Dec. 31, 2024.
The OBBBA included a number of temporary tax provisions that will sunset after several years to help the bill comply with Congress’ reconciliation rules.
The auto loan interest deduction was one of those temporary provisions, as it’s scheduled to remain in effect through the end of 2028, when it will sunset unless Congress acts to extend the policy.
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