With the average new-car payment at a record high, here’s a bright spot buyers may have missed: for the first time, interest on a car loan can be federally tax-deductible. The 2025 tax law created the break for 2025 through 2028. But the fine print is narrow — and it’s easy to overestimate what it’s worth. Here’s the honest version.
This is general information, not individual tax advice — the right treatment depends on your specific situation.
How the deduction works
You can deduct up to $10,000 of qualifying car-loan interest per year, for tax years 2025 through 2028. Crucially, you get it even if you take the standard deduction, which most people do — you don’t have to itemize. (Technically it’s claimed on the new Schedule 1-A and subtracted after adjusted gross income, so it lowers your taxable income but not your AGI — which matters for AGI-based tests like ACA premium credits.) The cap is per tax return, not per car, so a married couple with two qualifying loans still shares one $10,000 ceiling.
The big catch: new and U.S.-assembled
The vehicle must be new and have its final assembly in the United States. Used and leased vehicles do not qualify — which rules out many of the buyers stretching into the used market precisely because new cars are out of reach. The loan must also be taken out after 2024, be a first lien secured by the vehicle, and be for personal use. You can check your vehicle’s window sticker or VIN for the assembly location.
Income limits phase it out
The deduction starts phasing out at a modified adjusted gross income of $100,000 for single filers and $200,000 for joint filers, shrinking as income rises above those thresholds. Higher earners get a reduced deduction or none at all.
It’s a deduction, not a credit
This is where people overestimate the benefit. A deduction reduces your taxable income — so your actual savings are your tax rate times the interest, not the interest itself. On, say, $3,000 of car-loan interest, a typical buyer might save a few hundred dollars. Genuinely helpful, but not the difference between an affordable payment and an unaffordable one. Don’t let a modest tax break justify a seven-year loan on a car you can’t really afford.
Business owners: a separate, long-standing lane
If you use the vehicle for business, the business-use share of your loan interest has always been deductible as a business expense — independent of this new personal deduction, and often overlooked by the self-employed, contractors, and gig workers. If your car is part business, part personal, the mileage log that splits those two worlds matters more than ever.
How to claim it — and what to keep
Your lender may issue a Form 1098 reporting the interest (a vehicle-loan version of the familiar mortgage form). If you paid less than $600 in qualifying interest you may not receive one, but you can still calculate the deduction from your loan statements. Keep your purchase paperwork, the VIN/assembly information, and your interest records — and if the car does double duty, a contemporaneous mileage log.
The VarStan take
This is a real, and genuinely new, tax break — worth capturing if you were buying a qualifying new car anyway. But it’s narrow (new, U.S.-assembled, income-limited, temporary) and smaller than the headline $10,000 suggests once you remember it’s a deduction, not a credit. The right order of operations hasn’t changed: buy the car that fits your budget first, then claim every deduction you’re entitled to — not the other way around. If you’re unsure whether your vehicle or your income qualifies, it’s a quick thing to check before you file.
This article is general information, not tax advice. These rules are new and some details are still being clarified in IRS guidance; figures are for 2025 and subject to change. Please consult a CPA about your specific situation.
Related reading: Business Meals & Travel: What You Can Actually Deduct and The Home Office Deduction: Who Qualifies and How to Claim It.