Car Buyers: The New Interest Deduction Explained

If you're planning to buy a new car in 2025-2028, the One Big Beautiful Bill Act just gave you a significant tax break. You can now deduct up to $10,000 in car loan interest from your taxes each year.

This is huge. For someone financing a $40,000 vehicle at 7% interest, that could mean $1,500-2,000 in tax savings over the life of the loan. And unlike most tax deductions, this one is specifically designed to help everyday car buyers—not just wealthy people buying luxury vehicles.

But there are important rules about which vehicles qualify and who can claim the deduction. This guide explains everything you need to know.

What is the Car Loan Interest Deduction?

Starting in 2025, if you finance a qualifying new vehicle for personal use, you can deduct the interest you pay on that loan from your taxable income. The deduction is available from 2025 through 2028.

Key details:

• Maximum deduction: $10,000 per year
• Available from 2025-2028
• Applies to NEW vehicles only (no used cars)
• Vehicle must be assembled in the United States
• For personal use only (not business vehicles)
• Both itemizers and non-itemizers can claim it
• Subject to income phase-outs

Which Vehicles Qualify?

Not all vehicles qualify for the deduction. Here are the specific requirements:

1. Must Be a New Vehicle

The vehicle must be brand new, and the "original use" must begin with you. Used cars, certified pre-owned vehicles, and demo vehicles do NOT qualify—even if they're technically "new" to you.

2. Must Be Assembled in the United States

This is a critical requirement. The vehicle must undergo final assembly in the United States. This doesn't mean the parts have to be American—just that the final assembly happened at a US plant.

How to verify:

• Check the window sticker: Every new vehicle has a label showing where it was assembled
• Use the VIN decoder: Go to the NHTSA VIN Decoder website and enter your Vehicle Identification Number
• Ask your dealer: They can verify assembly location for you

Examples of US-assembled vehicles (as of 2025):

• Many Honda models (Accord, Civic, Pilot, Ridgeline, Odyssey)
• Many Toyota models (Camry, Avalon, Highlander, Tundra, Sequoia)
• Many Ford models (F-150, Mustang, Explorer, Edge)
• Many GM vehicles (Silverado, Tahoe, Suburban, Corvette, Camaro)
• Many Jeep/Ram models (Wrangler, Grand Cherokee, Ram 1500)
• Tesla models (Model 3, Model Y, Model S, Model X - most variants)
• Many Nissan and Volkswagen models

Note: Assembly locations change frequently. Always verify for your specific vehicle before purchasing.

3. Personal Use Only

The vehicle must be for personal use, not business or commercial use. If you use the vehicle partially for business, consult a tax professional about how that affects the deduction.

4. Specific Vehicle Types

Qualifying vehicles include:

• Cars
• Minivans
• Vans
• SUVs
• Pickup trucks
• Motorcycles

The vehicle must have a gross vehicle weight rating (GVWR) under 14,000 pounds. This rules out heavy-duty commercial trucks but includes virtually all consumer vehicles.

5. Loan Requirements

• Loan must be originated after December 31, 2024
• Loan must be used to purchase the vehicle
• Loan must be secured by a lien on the vehicle
• If you refinance a qualifying loan, the interest on the refinanced amount generally still qualifies

Important: Lease payments do NOT qualify. This deduction is only for financed purchases, not leases.

Income Limits and Phase-Outs

The deduction is subject to income-based phase-outs:

Single Filers

• Income under $100,000: Full deduction
• Income $100,000-$150,000: Deduction gradually reduces
• Income over $150,000: No deduction

Married Filing Jointly

• Income under $200,000: Full deduction
• Income $200,000-$300,000: Deduction gradually reduces
• Income over $300,000: No deduction

The phase-out reduces your deduction by 20% for every $10,000 of income over the threshold. Most middle-income car buyers will qualify for at least a partial deduction.

Real Savings Examples

Example 1: Young Professional Buying First New Car

Vehicle: 2025 Honda Civic (US-assembled)
Purchase price: $28,000
Loan: $25,000 at 6.5% for 60 months
Year 1 interest: $1,543
Income: $70,000 (single)
Tax bracket: 22%
Year 1 tax savings: $339
Total savings over loan: ~$850

Example 2: Family Buying SUV

Vehicle: 2025 Toyota Highlander (US-assembled)
Purchase price: $48,000
Loan: $45,000 at 7% for 72 months
Year 1 interest: $3,057
Income: $150,000 (married)
Tax bracket: 22%
Year 1 tax savings: $672
Total savings over loan: ~$2,200

Example 3: Higher-Income Buyer (Partial Phase-Out)

Vehicle: 2025 Ford F-150 (US-assembled)
Purchase price: $55,000
Loan: $50,000 at 6.8% for 60 months
Year 1 interest: $3,281
Income: $120,000 (single) - partial phase-out applies
Reduced deduction: ~$1,640
Tax bracket: 24%
Year 1 tax savings: $394
Total savings over loan: ~$1,000

Example 4: Maxing Out the Deduction

Vehicle: 2025 Chevy Silverado High Country (US-assembled)
Purchase price: $75,000
Loan: $70,000 at 7.5% for 72 months
Year 1 interest: $5,145 (but capped at $10,000 over life of loan)
Income: $180,000 (married)
Tax bracket: 24%
Year 1 tax savings: $1,234
Total savings (using full $10k cap): ~$2,400

How to Claim the Deduction

Claiming the car loan interest deduction is straightforward:

1. Buy a qualifying vehicle: New, US-assembled, for personal use
2. Save your documentation: Keep your sales contract, loan documents, and proof of US assembly (window sticker or VIN report)
3. Get Form 1098 from your lender: Your lender will send you a statement showing interest paid
4. Include VIN on your tax return: You must provide your vehicle's VIN when claiming the deduction
5. File jointly if married: Required to claim this deduction

Most tax software will have a section for the OBBB Act deductions. You'll enter your loan interest and VIN, and the software calculates your savings automatically.

Timing Your Purchase

The deduction is available for loans originated after December 31, 2024. If you're planning to buy a new car anyway, timing matters:

Best Time to Buy: Early 2025

Buying early in 2025 maximizes your benefit:

• You get the full year's interest deduction on your 2025 taxes
• You have a full four years (2025-2028) to claim the deduction
• Interest is highest in the early years of a loan

Buying Later (2026-2028)

You can still benefit, but you'll have fewer years to claim it. For example, if you buy in 2027, you only get 2027-2028 (two years) of deductions.

Common Questions About the Car Loan Deduction

What about electric vehicles?

Electric vehicles qualify as long as they meet all the requirements (new, US-assembled, personal use). Many EVs are assembled in the US, including most Teslas. This deduction is separate from EV tax credits—you might qualify for both!

Can I deduct interest on multiple vehicles?

Yes, but the total interest deducted across all vehicles can't exceed $10,000 per year. If you and your spouse each have qualifying vehicles, you still share the single $10,000 annual cap.

What if I refinance my car loan?

Interest paid on a refinanced qualifying loan generally still qualifies for the deduction, as long as the original loan met all requirements.

Does a down payment affect my deduction?

No. The deduction is based only on interest paid, not your down payment or purchase price. A larger down payment means a smaller loan and less interest—and therefore less to deduct.

What if I trade in my old car?

Trade-ins don't affect eligibility. The new vehicle just needs to meet all the requirements.

Can I claim this if I co-sign for someone else?

Only the person who owns and uses the vehicle can claim the deduction, even if someone else is making the payments.

Which Brands Build in the US?

Here's a general guide to brands with significant US manufacturing (always verify your specific model):

Heavy US Production:

• Honda: Many cars and SUVs
• Toyota: Major SUVs and trucks
• Ford: Most trucks and many SUVs
• GM (Chevy, GMC, Buick, Cadillac): Most trucks and many SUVs
• Jeep/Ram: Several models
• Tesla: Most models

Moderate US Production:

• Nissan: Some models
• Volkswagen: Select models
• Mercedes-Benz: Some SUVs
• BMW: Some SUVs
• Subaru: Some models

Minimal/No US Production:

• Most Korean brands (Hyundai, Kia, Genesis)
• Most European luxury brands
• Most Japanese brands except those listed above

Always verify your specific model! Even within brands, some models are US-built and others aren't.

Maximizing Your Benefit

Here's how to get the most from this deduction:

1. Buy US-assembled: Check assembly location before you shop
2. Buy early in 2025: Get all four years of deductions
3. Finance rather than pay cash: If you're close on the decision, the tax deduction might tip the scales toward financing
4. Consider a slightly longer loan: More interest = bigger deduction (but weigh this against total cost)
5. Keep excellent records: Save all documentation

What Happens After 2028?

The car loan interest deduction expires after 2028. If you finance a car in 2028, you only get one year of deductions. But if you bought in 2025 on a 5-year loan, you get four years (2025-2028) even though you're still paying in 2029-2030.

Whether the deduction gets extended depends on future Congressional action.

Bottom Line for Car Buyers

If you're planning to buy a new car in the next few years, the OBBB Act's interest deduction could save you $500-2,500 over the life of your loan. The key requirements:

• Buy new (not used)
• Assembled in the US (check VIN or window sticker)
• For personal use
• Finance with a loan (not lease)
• Income under the phase-out limits

Use our calculator to see your potential savings. Verify your desired vehicle qualifies before purchasing. And keep all your documentation for tax time.

This is one of the most valuable car-buying tax breaks in years. If you're in the market for a new vehicle, make sure you take advantage of it.