New Deduction for Car Loan Interest: What the “No Tax on Car Loans” Provision Means for You

For many households, the cost of owning a car is one of the largest monthly expenses — and until now, car loan interest hasn’t been tax-deductible for personal vehicles. That’s about to change.

Under the latest tax reform package, the government is offering a new temporary deduction for interest on car loans. Here's what you need to know about this 2025–2028 opportunity.

What’s Changing?

For tax years 2025 through 2028, individuals can deduct up to $10,000 per year in interest paid on a qualifying car loan — even if they don’t itemize deductions.

This is a first-of-its-kind personal interest deduction, aimed at lowering the cost of car ownership for middle-income families.

Who Qualifies?

To claim the deduction:

  • The loan must be for a personal-use vehicle

  • The vehicle must be brand new (original use starts with the taxpayer)

  • The loan must be a first-lien car loan (not a lease or second mortgage)

  • The vehicle must be final-assembled in the United States

  • You must report the VIN on your tax return

Income Phaseout Applies

The deduction phases out as income increases:

  • Full deduction available up to $100,000 modified AGI (or $200,000 for joint filers)

  • Reduced by $200 for every $1,000 over the threshold

  • Completely phased out at $150,000 MAGI (or $250,000 joint)

Example:
If your joint income is $215,000:

  • You’re $15,000 over the threshold

  • Your deduction is reduced by $3,000 (15 × $200)

  • If you paid $6,000 in car loan interest, you could deduct $3,000

Which Vehicles Are Eligible?

An “applicable passenger vehicle” must:

  • Be used for personal purposes (not business or fleet)

  • Be a car, SUV, pickup, van, or motorcycle

  • Weigh under 14,000 pounds

  • Be manufactured for public road use

  • Be assembled in the U.S.

  • Not be salvage or scrap

Leased vehicles do not qualify, nor do commercial or fleet vehicles.

What About Refinancing?

Refinancing is allowed — but only up to the amount of the original loan. The refinanced loan must still be secured by the same vehicle.

How Is the Deduction Claimed?

  • This deduction is above-the-line, meaning you can take it even if you don’t itemize

  • You must include the VIN on your return

  • The lender will be required to issue an information statement, similar to a mortgage interest form, including:

    • Year, make, and model

    • Loan origination date

    • Interest paid during the year

Lenders Must Comply with New Reporting Rules

Auto lenders will be required to:

  • File new IRS Form 109X (specific number TBD)

  • Include key loan and vehicle details (VIN, interest, balance, etc.)

  • Send a copy to borrowers by January 31 each year

When Does It Start?

  • Applies to loans issued after December 31, 2024

  • Deduction available for 2025 through 2028

  • After 2028, the deduction expires unless Congress renews it

This new deduction is a significant step toward easing the financial burden of car ownership, particularly for working families outside of urban transit systems.

It also rewards the purchase of American-assembled vehicles, adding a subtle manufacturing incentive to the tax code.

Considering a new car purchase in 2025? Let us help you evaluate how much interest you can deduct and whether your vehicle and loan structure will qualify.