Under Trumps Tax Bill passed on Independence Day 2025, car buyers who take a loan to buy a new car will be eligible for an above-the-line federal tax deduction when filing their tax returns.
This temporary but powerful deduction that applies to new car interest payments made from January 1, 2025, through the end of 2028. Some key points to note from the legislation (per the IRS)
- The new deduction can be claimed to deduct interest paid on a loan used to purchase a qualified vehicle from Jan 1st 2025 , provided the vehicle is purchased for personal use and meets other eligibility criteria as defined below
- This deduction is for new cars only where you are the first owner
- Interest payments for used cars or lease payments on any type of car do not qualify
- The maximum annual deduction is $10,000. But you can take it over multiple years that the credit is available (2025 to 2028)
- This above the line deduction is limited based on income (AGI): $100,000 for single filers and $200,000 for joint filers. It will completely phase out for those earning more than $150,000/$250,000 (single/married)
This deduction is huge deal because it makes buying a car more affordable for millions of Americans. Think of it like a new mortgage interest deduction, but for your car.
Qualified vehicle interest deduction
To qualify for the deduction, the interest must be paid on a loan that is:
- Originated after December 31, 2024 (so effective from Jan 1st, 2025). The loan must be on a qualified vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds, and that has undergone final assembly in the USA (based on VIN decoder)
- Used to purchase a new vehicle for direct personal use of the the taxpayer. Will not qualify if vehicle is used for business or commercial use (which can take a business tax deduction)
- Secured by a lien on the vehicle.
- It’s an “above-the-line” deduction, which is a fancy way of saying you can claim it even if you take the standard deduction. You don’t have to itemize your taxes to benefit, which opens this up to a much wider range of taxpayers
What if I Refinance my Vehicle?
If you refinance your new car, any interest paid on the refinanced amount is also generally eligible for the deduction.
Lenders or other recipients of qualified interest must report details to the IRS and furnish statements to taxpayers showing the total amount of interest received during the taxable year.
How It Works: A Simple Example
Let’s put this into perspective. Imagine you’re in the market for a new car in 2025 and you get a $40,000 loan at a 7% APR. In your first year of ownership, you might pay roughly $2,700 in interest.
If you’re a single filer making $75,000 a year, you’d be able to deduct the entire $2,700 from your taxable income. For someone in the 22% tax bracket, this would translate to a tax savings of nearly $600!
As the loan matures, the interest portion of your payments decreases, but you can continue to claim the deduction for a smaller amount each year until the end of 2028.
How this can impact your new car buying experience
Buying a car is rarely an especially rewarding experience, but this new car interest tax deduction you can likely justify buying a new car vs sticking to a used car. Here are some tips to keep in mind
Shop Smart: When you’re at the dealership, consider how this deduction impacts your total cost of ownership. A slightly higher interest rate on a loan for a qualifying vehicle might still be a better deal than a lower rate on a non-qualifying one, once you factor in your tax savings.
Keep Your Records: When it comes time to file your taxes, you’ll need to show proof. Hang onto your loan documents and the annual interest statements from your lender. You’ll also need the Vehicle Identification Number (VIN) to claim the deduction.
Check for Other Incentives: Trump’s new tax bill also has some other provisions. For example, the electric vehicle (EV) tax credit will be eliminated after September 30, 2025. However, since this new car loan deduction is retroactive to January 1, 2025, you might be able to stack the remaining EV tax credit with this new interest deduction if you purchase a qualifying EV before the deadline. It’s a limited-time opportunity for a double win!
The sunset date of 2028 for this deduction is a key part of its design. It’s meant to be a temporary stimulant, creating a window of opportunity for car buyers and the auto industry alike. Whether Congress will choose to extend it in the future remains to be seen, but for now, the path is clear.