New Tax Credit Insights: Can You Deduct Car Loan Interest on a Vehicle Purchase?

Overview of the car loan interest deduction for individuals

H.R. 1 (formerly the One Big Beautiful Bill Act) expanded several tax deductions and credits for individuals, including car loan interest. If you’re planning to purchase a new car or already have in 2025 you may be eligible for a unique tax deduction that could help reduce your tax liability over the next few years.

For tax years 2025 through 2028, individuals can deduct interest paid on “qualified passenger vehicle loans” for new personal-use vehicles. This is an opportunity for a tax deduction under federal tax rules. But as always, eligibility depends on meeting specific criteria.

Who qualifies for this deduction?

To qualify for the deduction, the vehicle must be:

• Purchased new (used vehicles are not eligible).
• For personal use only (business or commercial vehicles do not qualify).
• Under 14,000 pounds gross vehicle weight rating (includes most cars, SUVs, pickup trucks, minivans, and motorcycles).
• Final assembly took place in the United States.
  • The VIN Decoder website for the National Highway Traffic Safety Administration (NHTSA) provides plant of manufacture information. Taxpayers can follow the instructions on that website to determine if the vehicle’s plant of manufacture was located in the United States.
• Purchased with a loan originated between January 1, 2025, and December 31, 2028.

How much can you deduct?

Eligible taxpayers can deduct up to $10,000 per year in interest paid on qualified vehicle loans. This deduction is taken “above the line”, meaning it reduces your adjusted gross income (AGI) and is available regardless of whether you itemize or take the standard deduction.

However, there is an income limit:

• The deduction begins to phase out for individuals with a modified adjusted gross income (MAGI) over $100,000, or $200,000 for joint filers.
• The deduction is reduced by $200 for every $1,000 of MAGI above these thresholds and disappears entirely for single filers with MAGI over $150,000 and joint filers with MAGI over $250,000.

What about refinanced loans?

Good news: If you refinance a qualifying loan, interest on the refinanced balance will generally still qualify so long as the original loan met all eligibility requirements.

IRS reporting requirements

Under H.R.1, there will be new IRS reporting requirements on lenders. Lenders or other recipients of qualified interest must file information returns with the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year.

Additionally, you must report the Vehicle Identification Number (VIN) on your tax return each year the deduction is claimed.

The IRS will provide transition relief for tax year 2025 for interest recipients subject to the new reporting requirements.

Questions about your eligibility for this deduction?

If you qualify, this new deduction can lead to meaningful tax savings. Your Keiter Opportunity Advisor can guide you through the requirements and help you maximize your tax position. Email |Call: 804.747.0000