New Car Loan Interest Deduction 2025: How to Claim Up to $10,000

The One Big Beautiful Bill Act (OBBBA) created a brand-new above-the-line tax deduction for interest paid on auto loans for new vehicles, allowing buyers to deduct up to $10,000 in loan interest per year from their federal income tax. This deduction is available for tax years 2025 through 2028 and applies to original purchase financing on new cars, trucks, SUVs, and vans purchased after the law's July 2025 signing date. Combined with the existing EV tax credit, qualifying electric vehicle buyers could see combined first-year tax benefits exceeding $9,700.

Use our Car Loan Interest Deduction Calculator to estimate your exact savings based on your loan amount, interest rate, and income level.

What Is the Car Loan Interest Deduction?

The car loan interest deduction is a new above-the-line deduction introduced by the OBBBA. It allows taxpayers to deduct up to $10,000 per year in interest paid on qualifying auto loans. As an above-the-line deduction, it reduces your adjusted gross income (AGI) directly, which means you can claim it whether you take the standard deduction or itemize. This makes it accessible to the roughly 90% of taxpayers who use the standard deduction.

Before the OBBBA, personal auto loan interest was not deductible at all. This was a significant change from pre-1986 tax law, when all personal interest was deductible. The Tax Reform Act of 1986 eliminated the personal interest deduction, and for nearly 40 years, car buyers had no way to deduct their loan interest unless the vehicle was used for business. The OBBBA partially reverses that by allowing the deduction for new vehicle purchases, claimed on the new Schedule 1-A alongside the overtime and tip deductions.

Which Vehicles Qualify?

The deduction is limited to new vehicles only. Used cars, certified pre-owned (CPO) vehicles, and previously titled vehicles do not qualify. The vehicle must be purchased new from a dealer with original financing — refinanced loans on previously purchased vehicles are excluded, even if the original vehicle was purchased new.

Any vehicle type qualifies: cars, trucks, SUVs, vans, and minivans are all eligible. There is no vehicle price cap for the deduction itself, though the income phaseout (discussed below) effectively targets the benefit toward middle-income buyers. Leased vehicles do not qualify because lease payments are not structured as loan interest. If you are considering a lease versus a purchase, this deduction could tip the financial analysis in favor of buying.

The purchase must occur after the OBBBA's signing date in July 2025. Vehicles purchased earlier in 2025, even if they are new, do not qualify for the deduction on the 2025 tax return. However, interest paid on qualifying loans during any portion of the 2025 tax year after the purchase date is deductible.

The $10,000 Cap and Income Phaseout Explained

The maximum deduction is $10,000 per year in auto loan interest. For most car buyers, this cap is unlikely to be a constraint — on a $40,000 loan at 6% interest, first-year interest is approximately $2,300, well below the cap. Even on a $75,000 loan at 8%, first-year interest of roughly $5,800 stays under the limit. Only buyers with very large loans or very high interest rates would approach the $10,000 cap.

The deduction includes an income phaseout. For single filers, the phaseout begins at $100,000 of modified adjusted gross income (MAGI) and the deduction is fully eliminated at $110,000. For married couples filing jointly, the phaseout begins at $200,000 and is fully eliminated at $210,000. The reduction is dollar-for-dollar: for every dollar of income above the threshold, the maximum deduction decreases by one dollar.

For example, a single filer with $105,000 in MAGI would have their maximum deduction reduced by $5,000, leaving a cap of $5,000 instead of $10,000. If their actual interest paid was $3,000, they could still deduct the full $3,000 because it falls under the reduced cap. A single filer earning $112,000 would receive no deduction at all.

How to Calculate Your Deductible Auto Loan Interest

Your lender should provide an annual interest statement showing the total interest paid during the tax year. For auto loans, lenders are expected to provide Form 1098 or an equivalent statement by January 31 of the following year. This is the primary document you need to determine your deduction amount.

Only interest actually paid during the tax year counts toward the deduction. If you purchased your vehicle in September 2025, only the interest paid from September through December would be deductible on your 2025 return. A full 12 months of interest would be deductible starting in 2026. Early in the loan when more of each payment goes toward interest, your deduction will be larger. As the loan amortizes and more goes toward principal, the deductible amount decreases each year.

Here is a practical example. Suppose you purchase a new vehicle with a $40,000 loan at 6% APR on a 60-month term. Your monthly payment is approximately $773. In the first year, roughly $2,300 goes toward interest. That $2,300 is your deduction. If you are in the 22% tax bracket, this saves you $506 in federal income tax. By year three, annual interest drops to roughly $1,500, and your tax savings decrease to $330.

Use the Car Loan Interest Deduction Calculator to model your specific loan terms and see a year-by-year projection of your deductible interest and tax savings.

Car Loan Deduction vs. EV Tax Credit: Can You Get Both?

Yes — the car loan interest deduction and the electric vehicle (EV) tax credit are separate provisions, and you can claim both on the same vehicle. The EV tax credit provides up to $7,500 as a direct credit against your tax liability for qualifying electric and plug-in hybrid vehicles. The car loan interest deduction provides up to $10,000 as an above-the-line deduction that reduces your taxable income.

The combined benefit can be substantial. Consider a buyer who purchases a $45,000 qualifying EV with a $40,000 loan at 6% interest. In the first year, they could claim a $7,500 EV credit plus a $2,300 interest deduction. The EV credit directly reduces taxes owed by $7,500. The interest deduction reduces taxable income by $2,300, saving roughly $506 at a 22% rate. Total first-year tax benefit: approximately $8,006. Over the first three years of the loan, the combined benefit could exceed $9,700 when factoring in decreasing interest deductions alongside the one-time EV credit.

Keep in mind that the EV credit has its own eligibility rules, including vehicle price caps ($55,000 for sedans, $80,000 for SUVs/trucks), MAGI limits ($150,000 single/$300,000 MFJ), and domestic manufacturing requirements. The car loan interest deduction has lower income limits ($100,000/$200,000), so buyers above the interest deduction phaseout may still qualify for the EV credit but not the loan interest deduction.

How to Claim It on Your 2025 Tax Return

The car loan interest deduction is reported on the new Schedule 1-A, which was created by the OBBBA for its above-the-line deductions. You do not need to itemize to claim it. The deduction reduces your AGI on Form 1040, flowing through to lower taxable income before the standard deduction or itemized deductions are applied.

To claim the deduction, you will need your annual interest statement from your lender (Form 1098 or equivalent), your loan agreement showing it is original purchase financing for a new vehicle, and proof of the vehicle's purchase date (showing it was after the OBBBA signing date). Keep these documents with your tax records in case of an IRS inquiry.

Most major tax software programs have been updated to include Schedule 1-A and will guide you through the car loan interest deduction. If you file manually, complete Schedule 1-A with your interest amount, apply the income phaseout if applicable, and carry the deduction to Form 1040. The New Tax Law Calculator can help you see how this deduction fits into your overall 2025 tax picture alongside other OBBBA provisions.

If you purchased your vehicle late in 2025, remember that only interest paid during the 2025 tax year is deductible on your 2025 return. The full annual interest amount becomes available starting with your 2026 return. Plan accordingly if you are deciding between a late-2025 and early-2026 purchase — the tax year impact may differ significantly.

Frequently Asked Questions

Do used cars qualify for the car loan interest deduction?

No. The car loan interest deduction applies only to new vehicles. Used cars, certified pre-owned vehicles, and previously titled vehicles do not qualify, regardless of their age or condition. The vehicle must be purchased new from a dealer with original financing. If you are buying a used vehicle, this deduction is not available to you, though other tax benefits may apply depending on your situation.

Can I deduct interest on a car I already own?

No. The deduction applies only to loans originated for new vehicle purchases made after the OBBBA was signed into law in July 2025. If you already own a vehicle — even one purchased new in early 2025 or 2024 — the interest on that loan does not qualify. Refinancing an existing loan also does not make it eligible. Only original purchase financing on qualifying new vehicles purchased after the effective date qualifies.

What if I co-sign a loan for someone else?

Co-signer situations are complex under this deduction. If you co-sign a loan and are also a titled owner of the vehicle, and the loan payments come from your funds, you may be able to claim the deduction. However, only one taxpayer can claim the deduction per vehicle — both co-signers cannot each claim the full interest. The IRS has not yet issued final guidance on co-signer situations, so consult a qualified tax professional if this applies to you.

Does the deduction apply to business vehicles?

The car loan interest deduction is designed for personal vehicle purchases. Business vehicles already have separate and often more favorable deduction rules, including Section 179 expensing, bonus depreciation, and the standard mileage rate, all of which can cover interest as part of the overall business deduction. If a vehicle is used for both personal and business purposes, you may need to allocate the interest proportionally between personal use (eligible for this deduction) and business use (deductible under existing business rules).

Can I claim the deduction and also deduct car expenses for business?

If you use the vehicle for both personal and business purposes, you can potentially claim the personal-use portion of interest under the new Schedule 1-A deduction and deduct the business-use portion separately on Schedule C or through your business entity. The key rule is that you cannot double-count the same interest dollar. For example, if 60% of your vehicle use is personal and 40% is business, you would deduct 60% of the interest on Schedule 1-A and 40% on Schedule C.