Table of Contents
I didn’t even know this deduction existed until I was prepping my 2025 taxes. The auto loan interest deduction is brand new — created by the One Big Beautiful Bill Act (OBBBA) signed July 4, 2025 — and it lets you deduct up to $10,000 per year in car loan interest on qualifying vehicles. That’s money straight off your taxable income, whether you itemize or not.
On a $35,000 car loan at 7% interest, that’s roughly $2,400 in deductible interest in year one. At a 22% tax bracket, that saves you about $528 on your tax bill. Free money most people will miss because they don’t know it exists.
Here’s exactly how the auto loan interest deduction works, who qualifies, and how to claim it.
What Is the Auto Loan Interest Deduction?
The auto loan interest deduction is a new tax benefit under the OBBBA that allows taxpayers to deduct interest paid on qualifying auto loans — similar to how homeowners deduct mortgage interest. It’s an above-the-line deduction, which means you can claim it whether you take the standard deduction or itemize. This is a big deal because most tax breaks require itemizing.
The deduction applies to interest paid on loans for new vehicles purchased after January 20, 2025, and is currently scheduled to run through the 2028 tax year. After 2028, unless Congress extends it, the deduction expires.
This is one of several new tax changes under the OBBBA that directly impact regular taxpayers — not just high earners or business owners.
Who Qualifies for the Auto Loan Interest Deduction?
Not every car loan qualifies. Here are the requirements:
Vehicle requirements:
- Must be a NEW vehicle (used cars do not qualify)
- Must be assembled in the United States (foreign-assembled vehicles are excluded)
- Vehicle must be purchased after January 20, 2025
- The vehicle must be for personal use (not a fleet or business vehicle — business vehicles have separate deductions)
Income limits:
- Single filers: Modified adjusted gross income (MAGI) under $100,000 for the full deduction
- Married filing jointly: MAGI under $150,000 for the full deduction
- The deduction phases out above these thresholds and is fully eliminated at higher income levels
- These limits mean the deduction primarily benefits middle-income car buyers
Loan requirements:
- The loan must be in your name (or jointly with a spouse)
- Lease payments do not qualify — only loan interest on a financed purchase
- Refinanced auto loans may qualify if the original purchase met all other requirements
If you’re unsure whether your vehicle was assembled in the U.S., check your vehicle’s VIN — if it starts with 1, 4, or 5, it was assembled in the United States. You can also check the window sticker or the NHTSA VIN decoder for manufacturing details.
How Much Can You Deduct?
The auto loan interest deduction is capped at $10,000 per year in interest. For most car buyers, you won’t hit this cap — here’s what typical deductions look like:
| Loan Amount | Interest Rate | Year 1 Interest | Tax Savings (22% bracket) |
|---|---|---|---|
| $25,000 | 6.5% | ~$1,575 | ~$347 |
| $30,000 | 7.0% | ~$2,030 | ~$447 |
| $35,000 | 7.5% | ~$2,530 | ~$557 |
| $45,000 | 8.0% | ~$3,460 | ~$761 |
Your actual interest paid appears on the year-end statement from your auto lender. Some lenders also send a Form 1098 or similar interest statement — if yours doesn’t, log into your loan account or call them to get the exact amount of interest paid during the tax year.
The deduction reduces your taxable income, not your tax bill directly. So the actual savings depend on your tax bracket. Higher bracket = bigger savings per dollar deducted.
How to Claim the Auto Loan Interest Deduction on Your Taxes
Since this is an above-the-line deduction, claiming it is straightforward:
Step 1: Get your total interest paid for the tax year from your auto lender’s year-end statement.
Step 2: Confirm your vehicle qualifies (new, U.S.-assembled, purchased after January 20, 2025).
Step 3: When filing your taxes, enter the deduction on your Form 1040. If you’re using tax software like TurboTax or FreeTaxUSA, look for the “auto loan interest” or “vehicle interest deduction” section — most major tax software has already been updated for this new OBBBA provision.
Step 4: Keep documentation — your loan agreement (showing purchase date and VIN), year-end interest statement, and proof of U.S. assembly. You don’t need to submit these with your return, but keep them in case of an audit.
If you’re filing taxes for the first time or using free filing options like IRS Direct File, check whether the software supports this deduction — some free tools may not include it in their first year.
Auto Loan Interest Deduction vs. Other Vehicle Tax Breaks
The auto loan interest deduction is separate from other vehicle-related tax benefits. Here’s how they compare:
| Tax Break | What It Does | Who It’s For |
|---|---|---|
| Auto loan interest deduction | Deducts loan interest (up to $10K/year) | Personal car buyers with qualifying loans |
| EV tax credit | Up to $7,500 off purchase price | Electric vehicle buyers meeting income/price limits |
| Business vehicle deduction | Deducts vehicle expenses for business use | Self-employed / business owners |
| State sales tax deduction | Deducts sales tax on vehicle purchase | Taxpayers who itemize and choose sales tax deduction |
You can potentially stack the auto loan interest deduction WITH the EV tax credit if you buy a qualifying U.S.-assembled electric vehicle with a loan. That combination could save $10,000+ in year one between the credit and the interest deduction.
For the complete picture of all deductions and credits available to you, see our tax planning basics guide.
Common Mistakes to Avoid
Claiming interest on a used car. The deduction only applies to new vehicles. If you bought a used car — even a certified pre-owned — the interest is not deductible.
Claiming interest on a foreign-assembled car. Even if the brand is American (like a Ford assembled in Mexico), the vehicle must be physically assembled in the U.S. to qualify. Check the VIN.
Forgetting the income limits. If your MAGI exceeds $100,000 (single) or $150,000 (joint), the deduction phases out. You may get a partial deduction, or none at all.
Confusing this with a business deduction. If you’re self-employed and use your vehicle for business, you already have separate vehicle deduction options (mileage rate or actual expenses). The auto loan interest deduction is specifically for personal vehicles. Don’t double-dip.
Assuming it’s permanent. The deduction currently runs through 2028. Plan your car purchase timing accordingly — if you’re buying in 2027 or 2028, you’ll get fewer years of the deduction.
Frequently Asked Questions
Can I deduct auto loan interest on a used car?
No. The auto loan interest deduction only applies to new vehicles purchased after January 20, 2025. Used cars, certified pre-owned, and leased vehicles do not qualify. If you bought a used car, explore other ways to save money on transportation.
Do I need to itemize to claim the auto loan interest deduction?
No — this is an above-the-line deduction, meaning you can claim it whether you take the standard deduction or itemize. This makes it accessible to the vast majority of taxpayers who don’t itemize.
How long does the auto loan interest deduction last?
The deduction applies to tax years 2025 through 2028 under the current OBBBA provisions. Congress could extend it, but as of now it expires after the 2028 tax year.
Can I claim the auto loan interest deduction and the EV tax credit together?
Yes. If you purchased a qualifying U.S.-assembled electric vehicle with a loan, you can claim both the EV tax credit (up to $7,500) and the auto loan interest deduction (up to $10,000/year in interest). They are separate tax benefits.
What if I refinanced my auto loan?
If the original vehicle purchase met all the requirements (new, U.S.-assembled, purchased after January 20, 2025), interest on the refinanced loan should still qualify. Consult a tax professional if your refinancing situation is complex.
Disclaimer: BrokeMeNot provides financial information for educational purposes only. We are not tax professionals, CPAs, or enrolled agents. Tax laws change frequently — the auto loan interest deduction has specific eligibility rules that may change. Consult a qualified tax professional for your specific situation. Some links may be affiliate links. Read our full disclaimer.
Toyin Onagoruwa is the founding editor of BrokeMeNot. He works as a software engineer in banking and has over 5 years of experience writing about personal finance, credit cards, and frugal living. He combines his fintech engineering background with real-world money management experience to create financial content you can actually use. Connect with him on LinkedIn.