New Tax Break: How to Deduct Your Car Loan Interest

This tax season, many Americans may be able to lower their tax bill thanks to a new deduction for interest paid on car loans. This change was introduced by a law called the "One Big Beautiful Bill Act."

If you bought a new car recently, here is everything you need to know to see if you qualify for this savings.
 

1. Does your car qualify?

Not every car purchase counts. To get the deduction, your vehicle must meet three main requirements:
 

• It must be new: You must have purchased a brand-new car in 2025. If you bought a used car, or if you bought your car before December 31, 2024, you are not eligible.
• It must be for personal use: The deduction is for your personal vehicle, not a car used for business.
• It must be built in the U.S.A.: The car must have gone through its final assembly in the United States. Note: Does not matter if the brand is "American" (like Ford or Chevy) or "Foreign" (like Toyota or BMW). What matters is where that specific car was put together. You can check this by looking at your Vehicle Identification Number (VIN).

 

2. Do you qualify based on your income?

This tax break is designed for middle- and lower-income households. If you earn too much, you may not be able to claim it:
 

• Single filers: The benefit starts to disappear if you make $100,000 or more.
• Married couples filing jointly: The benefit starts to disappear if you make $200,000 or more.

The government uses your "Modified Adjusted Gross Income" (MAGI) to decide. This is your total income after certain things, like retirement contributions, are taken out.
 

3. How much can you save?

If you and your car qualify, you can deduct up to $10,000 in interest paid per year.

It is important to remember that a deduction is not the same as a tax credit:
 

1. A tax credit is like a gift card—it lowers your tax bill dollar-for-dollar.
2. A deduction lowers the amount of your income that can be taxed.

Example: If you are in the 22% tax bracket and you deduct $1,000 of interest, you won’t get $1,000 back. Instead, you will save about $220 on your taxes.
 

4. A special "Perk" for everyone

Usually, to deduct interest (like mortgage interest), you have to "itemize" your taxes, which is a lot of extra paperwork. However, this new car loan deduction is available to everyone, even if you take the "standard deduction."

This makes it much easier for the average person to claim.
 

5. How to claim it

You won’t receive a special form in the mail from your bank for this. To find out how much interest you paid, you will need to look at your final car loan statement from 2025.
 

What do the experts say?

While this is a "nice-to-have" financial boost for many families, experts don’t think it will change the car industry overnight.

Because the savings are relatively small (pennies on the dollar), it likely won't be the only reason someone chooses to buy a U.S.-made car over a foreign-made one.

Still, as the experts point out: "This isn't bad for anybody." If you qualify, it’s a helpful way to keep a little more money in your pocket.

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