Understanding the New Rules for Deducting Car Loan Interest

For years, interest on a car loan has been deductible only in limited circumstances—primarily when a vehicle is used for business purposes. However, new legislation now introduces a temporary deduction that, for the first time, extends eligibility to certain personal‑use vehicles purchased in the coming years.

The change was enacted as part of the One Big Beautiful Bill Act (OBBBA) and was implemented by the IRS through Notice 2025‑57. The deduction is available for loans beginning in 2025 and is designed to encourage new‑vehicle purchases and support domestic manufacturing.

Previous Rules: Business-Use Deduction Only

Under prior IRS guidance, car loan interest was deductible only when a vehicle was used for business.

• Business use: Self-employed individuals or business owners could deduct interest proportional to their business mileage. For example, if 60% of total miles were for business, 60% of the interest was deductible.
• Documentation required: Taxpayers had to maintain detailed mileage logs, including trip purposes, dates, and odometer readings, to substantiate the deduction.
• Deduction methods:
  • Actual expense method: Allowed interest to be included with total vehicle expenses together with amounts for other expenses such as gas, depreciation, insurance and repairs.
  • Standard mileage rate: Simpler to calculate but did not permit a separate deduction for loan interest.

Outside of business use, personal car loan interest was not deductible under federal tax law.

New Temporary Personal-Use Deduction (2025–2028)

Beginning in 2025, a new, temporary federal deduction allows individuals to deduct interest on loans for qualified new personal-use vehicles meeting the following criteria:

• Vehicle must be new
• Vehicle must be purchased, not leased.
• Purchase must be between January 1, 2025, and December 31, 2028.
• Final assembly must occur in the United States.
• Gross vehicle weight rating (GVWR) must be under 14,000 pounds.
• Eligible vehicles include cars, minivans, vans, SUVs, pickup trucks, and motorcycles.

Taxpayer criteria:

• Maximum deduction: Up to $10,000 in qualifying interest payments per year (aggregate across all vehicles).
• Income phaseouts: Deduction begins to phase out for single filers with modified adjusted gross income (MAGI) over $100,000 and for joint filers over $200,000. The deduction is reduced by $200 for each $1,000 of MAGI above the threshold and phases out completely at $150,000 (single) and $250,000 (joint).
• Loan requirements: The loan must originate after December 31, 2024, be secured by the vehicle, and be used to purchase a new vehicle. Refinanced loans remain eligible if the original vehicle qualified.
• Personal‑use limitation: Vehicles used for business or commercial purposes are excluded from this deduction.
• Claiming the deduction: It can be claimed whether or not you itemize deductions. Taxpayers must report the VIN on their return.
• Reporting form: The deduction is claimed on Schedule 1‑A, Additional Deductions, a new form introduced by the IRS to accommodate OBBBA provisions such as “No Tax on Tips,” “No Tax on Overtime,” and “No Tax on Car Loan ”

IRS Provides Reporting Relief for Lenders

The requirement to report the interest paid on car loans was placed on lenders. However, the IRS recently announced it will not penalize lenders who fail to provide detailed reporting on which borrowers qualify for the new deduction. Although the law requires lenders to report loan details—including the vehicle identification number (VIN) and loan principal—the IRS acknowledged that both lenders and government systems need time to update their reporting infrastructure.

During the initial implementation period, taxpayers may rely on statements from their lenders—including monthly or annual loan statements or online account summaries—as valid proof of interest paid. These will satisfy IRS documentation requirements for claiming the deduction.

Planning Considerations

While this new deduction can offer meaningful savings, eligibility is narrowly defined and subject to income phaseouts and vehicle‑assembly rules.

• Verify before buying: Confirm that your vehicle qualifies under the U.S. final‑assembly requirement using the VIN.
• Mind the timing: Only loans originating after December 31, 2024, qualify.
• Check your income level: Taxpayers near the MAGI thresholds should calculate potential benefits before assuming eligibility.
• Business owners: Continue using the appropriate business‑use deduction method (actual‑expense or standard‑mileage).

If you believe you might be eligible to deduct the interest on your car loan, make sure to include this information when providing your 2025 tax information to us. If you have any questions about how these new regulations may affect your tax strategy or business deductions, please reach out to your LMC professional.