If you recently financed a vehicle, you may be eligible for a new tax break when you file for the 2025 tax year. Some auto loan interest is now tax deductible in certain situations under the One Big Beautiful Bill (OBBB) Act, major tax legislation that President Trump signed on July 4, 2025.
Wondering if your car loan could reduce your tax bill? Read on to learn about the new tax deduction for auto loan interest, who’s eligible, and some rules you should know.
The One Big Beautiful Bill Act allows you to deduct up to $10,000 of auto loan interest from your federal taxes in some circumstances. Also called “no tax on auto loan interest,” the temporary deduction applies to tax years 2025 through 2028. It is an above-the-line deduction (similar to the student loan interest deduction), meaning you can claim it even if you take the standard deduction instead of the itemization.
But not everyone with a car payment will qualify. You will only be able to take advantage of the new deduction if the following applies:
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You got the loan after December 31, 2024 (leases will not qualify).
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The vehicle is for personal use.
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The vehicle is a car, minivan, van, SUV, truck, or motorcycle that weighs less than 14,000 pounds.
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You bought the new vehicle.
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The final assembly location of the vehicle is in the US (more on this shortly).
To qualify for the full auto loan interest deduction, your taxable income cannot exceed $100,000 if you are single or $200,000 if you are married filing jointly. The deduction will phase out if your income exceeds these thresholds. You won’t be able to deduct any car loan interest if your income is more than $150,000 (single filers) or $250,000 (joint filers).
To qualify for the deduction, your vehicle does not have to be an American make of car and it does not have to be “made in America,” but its final assembly location must be in the U.S. The distinction may be a bit nuanced, but the easiest way to see if your vehicle qualifies is to check the vehicle identification number (VIN).
You can use the National Highway Traffic Safety Administration’s (NHTSA) VIN decoder to verify your manufacturing plant. If you are purchasing a new vehicle, the dealer should have information about the plant’s location on the label attached to each vehicle.
Below you will find the final assembly location of the 10 most popular vehicles in the US (based on 2024 sales):
Let’s say you purchased a new vehicle that meets the criteria for the auto loan interest deduction in June 2025. Your total loan amount was $50,000. Your loan has a term of 60 months and an interest rate of 10%. Your first payment was due in July 2025, so you made six months of payments for the tax year.
Your monthly payments are approximately $1,062. Overall, your payments totaled about $6,374 in 2025, of which $3,956 was principal and the remaining $2,418 was interest. Your maximum deduction is $2,418.
Let’s say your filing status is single and your taxable income for 2025 is $80,000. You could deduct the full $2,418.
Because it’s a tax deduction versus a tax credit, it won’t reduce your tax bill dollar for dollar by $2,418. Instead, it reduces $2,418 from your $80,000 taxable income, bringing it to $77,582. Since your marginal tax rate is 22%, you would reduce your tax bill by about $532, or 22% of the $2,418 in interest you paid.
These are the basic steps you will need to follow to deduct car loan interest. Keep in mind that the best tax software will guide you through this process:
To deduct the vehicle on your tax return due April 15, 2026, you will need to have purchased and financed it in 2025. Used and leased vehicles will not qualify. Use NHTSA’s VIN decoder to confirm that your vehicle’s final assembly location was in the US.
You can only deduct the amount you paid in car loan interest, not the entire car loan payment. It is possible to calculate this number using a loan amortization calculator by adding the amount of each monthly payment earmarked for interest.
But a much easier method is to contact your lender. The IRS will require lenders to provide borrowers who are eligible for the auto loan interest deduction with an account statement showing interest paid in future years. But you may need to reach out to request this information for 2025.
You will need to file Schedule 1-A, a new IRS form that will be used to report above-the-line deductions. You will also use this form if you are deducting or qualify for the three other new above-the-line deductions created by OBBB: the tip tax-free deduction, the overtime tax-free deduction, and the enhanced deduction for seniors age 65 and older. In addition to the amount of interest paid, you will need to include your car’s VIN. You will then submit Schedule 1-A to the IRS with Form 1040 when you file your return.
All told, the car loan interest deduction probably won’t make much of a difference to your overall tax situation. But if you think you qualify, it’s worth gathering a couple of details so you can reduce your tax bill or get a larger tax refund.
Is auto loan interest tax deductible?
Auto loan interest may be tax deductible if you purchased a new vehicle after December 31, 2024, that was assembled in the U.S. You can only deduct up to $10,000 in interest. The deduction phases out if you earn more than $100,000 as a single filer or $200,000 if you are married filing jointly.
How can I deduct car loan interest from my taxes?
To deduct car loan interest from your taxes, you will need to provide the amount of interest paid and your VIN on a new form called Schedule 1-A. You will include this form when you file Form 1040.
Do electric vehicles qualify for the auto loan interest deduction?
Yes, if you purchased your new electric vehicle after December 31, 2024 and its final assembly location was in the U.S., you will likely qualify for the auto loan interest deduction. Assuming your vehicle qualifies, you can claim both the auto loan interest deduction and the clean energy credits that expired on September 30, 2025 on your tax return.
Is commercial auto loan interest tax deductible?
Yes, you can deduct loan interest on a vehicle used for business if you are self-employed or own a business. This deduction existed before the approval of the OBBB.
If you use the standard mileage rate (70 cents per mile in 2025), you can deduct vehicle expenses based on the miles you drove for business, plus the interest portion of the loan based on the percentage of time you use it for business. The actual expenses method requires a little more accounting, but bases your deduction on the total costs associated with the vehicle, including interest, depreciation, maintenance and gasoline.