Auto Loan Interest Tax Deduction: How It Works

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When taking out a new-vehicle loan, you can deduct up to $10,000 a year of interest on eligible auto loans initiated between 2025 and 2028.
And you don’t have to itemize deductions to get the benefit.
Vehicles must be new passenger vehicles (with a GVWR under 14,000 pounds) and must meet federal criteria as U.S. made.

New cars and trucks are increasingly expensive, but there is some relief in the form of a new tax deduction for the interest paid on auto loans. The recently signed budget legislation lets qualifying buyers deduct interest on new auto loans when filing their federal taxes. The intent is to encourage buyers to consider U.S.-manufactured cars, trucks, and SUVs. Here’s what you need to know.Jump to:

How It Works
“Qualifying” Is Strictly Defined
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Final Assembly in U.S. Is a Must Now
Projected Savings
The Bottom Line

How It WorksThe tax benefit allows car buyers to deduct up to $10,000 annually in interest paid on eligible auto loans. To qualify, the loan must be initiated between 2025 and 2028. Additionally, only vehicles purchased for personal use are eligible; those bought for business purposes do not qualify. Income levels also play a role in eligibility. The deduction is capped at $10,000 per year. It starts to phase out at a rate of 20 percent for single taxpayers earning over $100,000 per year and is fully phased out at $150,000. For married couples filing jointly, the phase-out begins for households earning more than $200,000 annually and is fully phased out at $250,000. The deduction is reduced by $200 for every $1000 above the limit.Perhaps the best part of this deduction is that taxpayers do not have to itemize their deductions to take advantage of the benefit. This is especially important since nine out of 10 taxpayers take the standard deduction, according to the IRS. JJ Gouin|Getty Images“Qualifying” Is Strictly DefinedVehicles must also meet specific criteria to qualify. First, they must be new, as used cars are entirely excluded under the bill’s terms. For this deduction, a vehicle is defined as “a car, minivan, van, sport-utility vehicle, pickup truck, or motorcycle” that is “manufactured primarily for use on public streets, roads, and highways.” The vehicle must also have a gross vehicle weight rating under 14,000 pounds.➡️ Skip the lot. Let Car and Driver help you find your next car.Shop New Cars Shop Used CarsFinal Assembly in U.S. Is a Must NowSecond, the vehicle’s final assembly must take place within the United States. Note that not all domestic-brand cars and trucks are built in the United States. Similarly, not all foreign-brand vehicles are imported. Some foreign-brand automakers operate manufacturing plants within the United States, and some domestic-brand cars and trucks are imported from Canada, Mexico, and elsewhere.welcomia|Getty ImagesTo find out if your vehicle had a final assembly point in the U.S., you can use the National Highway Traffic Safety Administration’s Vehicle Identification Number (VIN) decoder tool. Simply input the vehicle’s VIN and the model year, and the system will identify where the car was assembled. This allows you to ensure that your vehicle qualifies for the deduction.Projected SavingsTo better understand how this deduction could help car buyers, consider this example. Imagine purchasing a 2025 Toyota Highlander XSE, which has an MSRP of $48,635 (very near the median new-vehicle price of $48,000) and is assembled in Kentucky. If financed over five years at a 6 percent annual interest rate, the total interest for the first year would be roughly $2746. Say the taxpayers, a married couple filing jointly, earn $160,000 annually; they fall well within the income eligibility threshold and are in a 22 percent tax bracket. They could deduct $2746 from their taxable income for the first year of repayment, resulting in $604 in tax savings. Over the five-year loan term, with total annual interest declining each year as the loan is paid off, the taxpayer might save approximately $1936 in taxes overall.However, if the taxpayer’s income exceeds the phase-out range, the deduction amount would be reduced proportionally, limiting tax savings. Ultimately, this deduction provides modest savings for buyers financing mid-price vehicles that meet the eligibility criteria. The Bottom LineThe new deduction is estimated to cost the Treasury $31 billion over four years. For most new-car buyers, who purchase a vehicle near the median new-car price, the financial impact will be minor. The deduction is more of an advantage for those who can afford to purchase higher-priced models that engender greater loan interest. We always recommend buying the vehicle that best suits your needs and finances. But if deciding between two new vehicles, one of which would net the buyer this tax deduction, then that may be a consideration in their new-vehicle purchase. Car and Driver’s Marketplace