Personal loan interest hasn’t been deductible since the Tax Reform Act of the ’80s.
President Donald Trump changed that when he signed the One Big Beautiful Bill Act into law in July.
The legislation didn’t have an easy trip to the Oval Office, though. The House approved the measure in a 218-214 vote after the Senate approved it by a 51-50 vote.
Now, eligible Americans can deduct up to $10,000 per year in car loan interest on their federal income tax return.
That’s a nice chunk of change. Like with many tax deductions, however, it’s not quite that straightforward.
The tax break has numerous limitations, so it won’t help as many people as you might think. Here’s a breakdown of how it works.
Who is eligible
The good news here is that the new deduction for car loan interest is available to people who claim the standard deduction, not just those who itemize their tax deductions (which is only roughly 10% of taxpayers).
The limitation is on income. Only taxpayers with a modified adjusted gross income of $100,000 or less — or $200,000 or less in the case of married couples who file a joint tax return — can qualify for the full value of the deduction.
For people who earn more than that, the value of the deduction will be reduced by $200 for every $1,000 by which someone’s income exceeds the $100,000 or $200,000 threshold.
In other words, taxpayers with higher incomes either can’t deduct the full $10,000 or don’t qualify for the deduction at all, depending on exactly how high their income is.
When the deduction is available
The new tax deduction on car loan interest is only available for tax year 2025 through tax year 2028. So, you can only use it to deduct interest you pay during those four years.
The tax break is also limited to interest on loans that originated in 2025 through 2028. That means people who are currently paying back a car loan they took out in 2024 or earlier will not be able to deduct any of the interest on their taxes.
What cars are eligible
The good news here is that any type of passenger vehicle with at least two wheels potentially qualifies, as long as it weighs less than 14,000 pounds. That includes sedans, minivans, SUVs, pickup trucks and motorcycles.
But there are also many limitations.
To start, the tax deduction is limited to cars driven for personal use, not those for business or commercial use.
Additionally, it’s limited to new cars.
“[U]sed vehicles do not qualify,” as the IRS plainly puts it.
Leased vehicles don’t qualify, either. Only cars purchased with a loan that’s secured by a lien — basically, collateral — are eligible.
Another major limitation: Final assembly of a car must have happened in the U.S. For this reason, certain popular models from big brands like Ford, Honda, Hyundai, Kia, Chevrolet and Chrysler won’t qualify for the deduction.
Not sure if a vehicle meets this particular requirement? You can check using the U.S. National Highway Traffic Safety Administration’s free online VIN Decoder tool. Look for the plant of manufacture.
Regardless, taxpayers must report their vehicle identification number (VIN) on their tax return to claim the deduction.
The lender must also properly file loan information with the IRS, reporting the total amount of interest received each year. That means a loan from a buddy won’t qualify for the deduction.
Add a Comment