2025 Auto Loan Interest Tax Deduction: Complete IRS Guide
If you’re planning to buy a new vehicle and finance it, you may be asking a very important question: Is car loan interest tax deductible in 2025? For the first time in years, the answer is yes — for some taxpayers.
Under new federal tax provisions commonly referred to as the One Big Beautiful Bill Act (OBBBA), qualifying taxpayers may deduct interest paid on certain auto loans during tax years 2025 through 2028. This guide explains exactly who qualifies, how much you can deduct, and how to claim the deduction correctly under IRS rules.
Is Car Loan Interest Tax Deductible in 2025?
Car loan interest is deductible in 2025 if all IRS eligibility requirements are met. This is a significant policy change, as personal auto loan interest has historically been non-deductible for most taxpayers.
The deduction applies only to new vehicles that are assembled in the United States, and it is subject to income limits. Importantly, this deduction is classified as an above-the-line deduction, meaning you can claim it even if you take the standard deduction.
What Is the One Big Beautiful Bill Auto Loan Interest Deduction?
The auto loan interest deduction was introduced as part of the OBBBA to encourage domestic manufacturing while helping offset higher borrowing costs for consumers. Rising interest rates made vehicle financing more expensive, and this deduction was designed to provide targeted tax relief.
- Available for tax years 2025 through 2028
- Applies only to new, U.S.-assembled vehicles
- Allows deduction of up to $10,000 per year in interest
- Reduces Adjusted Gross Income (AGI)
2025 Income Limits for the Auto Loan Interest Deduction
Eligibility for the deduction depends heavily on your income. The IRS applies a phase-out once your income exceeds certain thresholds.
| Filing Status | Full Deduction Up To | Phase-Out Begins Above |
|---|---|---|
| Single Filers | $100,000 | $100,000 |
| Married Filing Jointly | $200,000 | $200,000 |
Once income exceeds these thresholds, the deduction gradually reduces until it is fully eliminated.
Which Vehicles Qualify for the 2025 Auto Loan Interest Deduction?
Not every new vehicle qualifies. The IRS focuses on final assembly location, not brand or country of origin.
Vehicle Requirements
- Must be new (first titled owner)
- Must be assembled in the United States
- Must be financed with a qualifying auto loan
- Must be used primarily for personal transportation
How to Check Assembly Location Using the VIN
The first character of the Vehicle Identification Number (VIN) indicates where the vehicle was assembled:
- 1, 4, or 5 — United States
- 2 — Canada
- 3 — Mexico
- J — Japan
Only vehicles with VINs beginning in 1, 4, or 5 generally qualify.
What Does Not Qualify?
Several common situations do not qualify for the deduction:
- Used vehicles
- Vehicle leases
- Refinanced auto loans
- Business-only vehicles (handled under separate rules)
How Much Auto Loan Interest Can You Deduct?
The maximum deduction is $10,000 per year in interest. Only the interest portion of your loan payments qualifies — not principal. Any interest above the cap cannot be carried forward to future years.
How to Claim the Auto Loan Interest Deduction
When filing your 2025 federal tax return:
- Obtain your annual interest statement from your lender
- Verify the vehicle’s VIN and assembly location
- Report the interest as an above-the-line deduction
- Retain documentation for IRS verification
Because this deduction reduces AGI, it may also improve eligibility for other tax benefits.
Final Thoughts
The 2025 auto loan interest tax deduction is one of the most meaningful changes for car buyers in recent years. However, it is also one of the most narrowly defined. Verifying eligibility before purchasing a vehicle can make the difference between a valuable tax benefit and a missed opportunity.
Frequently Asked Questions
Is car loan interest deductible if I take the standard deduction?
Yes. The deduction applies even if you do not itemize.
Does refinancing my car loan qualify?
No. Refinanced loans are not eligible.
Does an electric vehicle qualify?
Only if it is new and assembled in the United States.
Can I deduct interest on more than one vehicle?
Yes, as long as the total interest does not exceed the annual $10,000 cap.
Will this deduction exist after 2028?
Under current law, the deduction expires after the 2028 tax year.