When my wife bought a new Subaru Outback in March, the manufacturer offered special financing at 3.9% APR. We didn’t take it because while we could keep our cash in a money market fund earning 4%, the interest is taxable. The interest paid on the car loan would be after-tax. It would be net-negative if we financed.
The new 2025 Trump tax law — One Big Beautiful Bill Act — made car loan interest deductible (with qualifications and limits). Had we known this was coming, we would’ve financed, but we can’t go back now to get a loan and deduct the interest.
Only New Cars Assembled in the U.S.
Not all car loans qualify for the new tax deduction. It must be for a new car, not for a used car. It must be for personal use, not a commercial vehicle.
Both electrical and gasoline-powered vehicles qualify. Cars, minivans, SUVs, pickup trucks, and motorcycles all qualify, but the vehicle must have had its final assembly in the U.S.
My wife’s Subaru Outback would’ve qualified because it was assembled in Indiana. Some brands and models have cars assembled both in the U.S. and outside the U.S. It depends on the specific car you get from the dealership. You can tell by the VIN. A car is assembled in the U.S. if the VIN starts with a 1, 4, or 5.
Timing
The loan must be taken out at the time of purchase after December 31, 2024. Refinancing an existing loan taken out before January 1, 2025 doesn’t count. Taking out a new loan now on a car you already own free and clear doesn’t count either.
We’re disqualified because we already paid cash at the time of purchase.
If your loan qualifies, refinancing it continues to qualify, but the new loan must not exceed the outstanding balance of the previous loan. In other words, no cash-out refi.
Reporting
The bank or the financing company will have to report to you and the IRS the interest you paid on a qualifying loan after the end of the year. This will be similar to how they report for mortgage interest on Form 1098. You will use this information to claim a tax deduction when you do your taxes.
Income Limit
You’re allowed to deduct up to $10,000 in car loan interest if your AGI is $100,000 or less ($200,000 or less for married filing jointly). Married filing separately still qualifies. The deduction limit phases out by 20% as your income goes up toward $150,000 (or $250,000 for married filing jointly).
The $10,000 deduction limit is sufficient for most people. A 5-year loan of $50,000 at 3.9% APR would incur less than $2,000 in interest in the first year and less yet in subsequent years. There’s no limit on the number of cars or any maximum price.
The tables below illustrate how the deduction limit phases out at different income levels. Interpolate when your income is between the numbers shown in the tables.
Single
| AGI | Deduction Limit |
|---|---|
| $100,000 or less | $10,000 |
| $110,000 | $8,000 |
| $120,000 | $6,000 |
| $130,000 | $4,000 |
| $140,000 | $2,000 |
| $150,000 | $0 |
Married Filing Jointly
| AGI | Deduction Limit |
|---|---|
| $200,000 or less | $10,000 |
| $210,000 | $8,000 |
| $220,000 | $6,000 |
| $230,000 | $4,000 |
| $240,000 | $2,000 |
| $250,000 | $0 |
Temporary Deduction
If your car purchase qualifies, your timing qualifies, and your income qualifies, you’re allowed to deduct car loan interest up to the limit each year between 2025 and 2028 (inclusive). If you’re planning to buy a new car in 2026, then you have only three years left.
It’s a tax deduction, not a tax credit. Deducting $2,000 in car loan interest reduces your taxable income by $2,000. It reduces your federal income tax by a few hundred dollars, depending on your tax bracket.
The deduction is available to everyone, whether you itemize deductions or take the standard deduction, but it doesn’t lower your AGI. It doesn’t make it easier for you to qualify for other tax deductions or tax credits.
Higher Prices From Tariffs
Not everyone financing a new car purchase qualifies for the tax deduction, but everyone is affected by higher prices from tariffs. Subaru raised prices mid-year shortly after we bought the car. Dealerships also reduced their discount to the MSRP. We would have to pay $4,000 more if we were to buy the same car today.
Paying a higher price costs way more than the tax savings from deducting the interest on a car loan.
***
The headlines say no tax on car loan interest, but this deduction comes with many strings: only new purchases, only new cars and only specific cars, with an income limit, and only in the next few years. We would’ve financed because everything happened to line up, if only we knew. Even though financing and paying cash would be a wash financially, having more cash on hand helps with smoothing out cash flow to stay under the ACA health insurance premium cliff.
You’ll find more deep dives on recent changes from the 2025 Trump tax law in the full OBBBA series.
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Alwyn says
When you say ‘available to non-itemizers’, does it mean that you get it even if you take the standard deduction?
Harry Sit says
That’s correct. I edited the phrasing to make it more clear.
Jack M. Reese says
So, do you get the write off at the front end of the loan? Or, do you get it in increments when filing your taxes.
Harry Sit says
When filing your taxes. The bank or financing company will send you a form after the end of the year to tell you how much interest you paid (only for qualifying loans), similar to how they do it for mortgage interest on a Form 1098 now. You use the information to claim a deduction on your tax return.