Car Loan Interest Is Now Deductible (2025–2028): What You Need to Know
If you financed a vehicle recently — or plan to — there’s an important tax update you should know about.
Under the One Big Beautiful Bill Act, eligible taxpayers may now deduct qualified car loan interest on their federal tax return for tax years 2025 through 2028.
While some are calling it “no tax on car loan interest,” what this actually means is that certain taxpayers can claim a deduction for interest paid on a qualifying vehicle loan.
Here’s how it works.
What’s New?
For 2025–2028, you may deduct up to:
$10,000 per year in car loan interest
This deduction:
Applies to qualifying personal-use vehicles
Can be claimed even if you take the standard deduction
Reduces your taxable income
Is subject to income limits
It’s important to understand that this deduction applies to interest only, not your full car payment.
Who Qualifies?
You may qualify if:
You purchased a new qualifying vehicle
The vehicle is for personal use
The vehicle meets domestic manufacturing requirements under the law
Your income falls within the allowed range
Income Phaseout Limits
The deduction begins to phase out when your modified adjusted gross income (MAGI) exceeds:
$100,000 for Single filers
$200,000 for Married Filing Jointly
If your income is above these thresholds, the deduction may be reduced or eliminated.
What Vehicles Qualify?
To qualify:
The vehicle must be new (used vehicles do not qualify under this provision)
It must meet the law’s “made in America” requirements
The loan must be for purchase (leases do not qualify)
If you leased your vehicle, unfortunately this deduction does not apply.
Because eligibility depends on the vehicle’s classification and purchase timing, confirming qualification before filing is important.
How This Impacts Your Tax Return
Since this is a deduction (not a credit), it lowers your taxable income.
That may:
Reduce your federal tax bill
Increase your refund
Provide greater benefit if you are in a higher tax bracket
The actual savings will depend on how much interest you paid during the year and your overall tax situation.
Common Questions
Can I deduct my full car payment?
No. Only the interest portion qualifies.
Does this replace business vehicle deductions?
No. Business-use vehicle deductions are separate and follow different rules.
Can I deduct interest on a used car?
No. This provision applies to new qualifying vehicles only.
What if I financed before 2025?
Eligibility depends on when the loan was originated and whether it falls within the allowed timeframe.
What You Should Do
If you financed a vehicle in 2025 or plan to before 2028:
✔ Keep your year-end loan statement showing interest paid
✔ Save your purchase agreement
✔ Confirm the vehicle meets qualification requirements
✔ Monitor your income if you’re near phaseout thresholds
Strategic tax planning can make a meaningful difference — especially with temporary provisions like this one.
The Bottom Line
Yes — for a limited time, car loan interest may be deductible under the One Big Beautiful Bill Act.
But qualification depends on:
Vehicle type
Purchase timing
Income level
Proper documentation
At Correct Choice Tax Solutions, we stay current on federal tax law changes so you don’t miss opportunities.
If you financed a vehicle recently, let’s review your situation and make sure you’re taking full advantage of what you’re entitled to.