New Car Loan Interest Deduction for 2025
The One Big Beautiful Bill Act introduced a brand-new above-the-line deduction for interest paid on loans used to purchase new vehicles. This deduction allows qualifying taxpayers to deduct up to $10,000 in car loan interest from their federal taxable income for tax years 2025 through 2028. The deduction is available regardless of whether you take the standard deduction or itemize — it reduces your adjusted gross income directly on Schedule 1-A.
For a buyer financing a $40,000 new car at 6% interest, annual interest in the first year would be approximately $2,300. At a 22% marginal federal tax rate, the deduction would save roughly $506 in federal taxes. For higher-value vehicles with larger loans, the savings can be substantially more — up to $2,200 in federal tax savings alone at the 22% bracket on the maximum $10,000 deduction.
Who Qualifies: New Vehicles Only
The deduction is strictly limited to interest on purchase loans for new vehicles. Used vehicles, certified pre-owned vehicles, leased vehicles, and refinanced loans on existing vehicles do not qualify. The vehicle must be new at the time of purchase, and the loan must be the original purchase financing. Cash purchases do not qualify since no interest is paid. The vehicle can be a car, truck, SUV, or van — there are no restrictions on vehicle type or fuel source.
The purchase must occur after the OBBBA was signed into law in July 2025. Vehicles purchased before that date, even if currently being financed, do not qualify for the deduction. If you trade in a vehicle and finance a new one, the interest on the new loan qualifies, but any carried-over balance from the old loan does not.
How to Calculate Your Deductible Car Loan Interest
Your auto lender will provide an annual interest statement showing the total interest paid during the tax year. For loans originated mid-year, only the interest actually paid in 2025 is deductible. The deductible amount is the lesser of your total qualifying interest or $10,000, minus any phaseout reduction based on your income. Keep your loan agreement, payment records, and interest statements for your tax records.
Income Limits and the Phaseout Threshold
The car loan interest deduction phases out at higher income levels. For single filers, the phaseout begins at $100,000 MAGI, reducing the deduction dollar-for-dollar. At $110,000, the deduction is fully eliminated. For married filing jointly, the phaseout starts at $200,000 and eliminates the deduction at $210,000. This means the deduction primarily benefits middle-income car buyers — those most likely to finance a new vehicle purchase.
Car Loan Deduction vs. EV Tax Credit: How They Interact
The car loan interest deduction and the Clean Vehicle Tax Credit (EV credit of up to $7,500) are completely separate provisions. You can claim both if you qualify for each. A buyer who finances a new electric vehicle could potentially receive a $7,500 tax credit plus a deduction of up to $10,000 in loan interest. The EV credit is a direct credit against tax liability, while the loan interest deduction reduces taxable income. Together, the combined benefit for a qualifying EV purchase with financing could exceed $9,700 in tax savings in the first year.