Car Loan Interest Could Save You Thousands on Your Taxes This Year. Here’s a suitable one.
If you financed a new car last year, there’s a tax break you should know about that could put hundreds of dollars back in your pocket.
The auto loan interest deduction, signed into law by President Donald Trump last summer as part of the One Big Beautiful Bill Act, allows eligible taxpayers to write off interest paid on qualifying auto loans.
As the cost of car ownership reaches its peak, this deduction could provide relief to American drivers. But before you get too excited, here’s what you need to know and how to check if you’re eligible.
Eligible for deduction
This tax discount is not available to everyone who bought a car last year. You’ll need to check a few boxes to claim it.
First, the car must be new. If you bought a used car or leased a car, you will not be eligible.
Second, the car must have been last assembled in the US The car must have been assembled in a US factory before going to the dealership.
You can confirm where your vehicle was assembled by asking at the place of purchase, looking up your vehicle identification number (VIN) or checking the National Highway Traffic Safety Administration website.
Third, the vehicle must be purchased for personal use and weigh less than 14,000 pounds. According to the IRS, motorcycles, trucks, vans, SUVs, minivans and cars are eligible, while trailers, campers and motorhomes are not. Business vehicles are also not eligible for this tax break.
Deduction limits
This tax deduction is effective for tax years 2025 to 2028. It has a maximum annual value of $10,000, which comes out of high income.
Individual filers with adjusted gross income (MAGI) of up to $100,000 can claim the full deduction. Married couples filing jointly can earn up to $200,000 and still qualify for the maximum benefit. Your MAGI is the sum of your adjusted gross income and any tax-free income.
Married couples filing separately can claim the full amount if they both have eligible vehicles.
Above those limits, the deduction drops by $200 for every additional $1,000 you earn. So a single filer making $110,000 would see their deductions potentially reduced by $2,000.
You also don’t have to do anything to claim this deduction. It’s available whether you take the standard deduction or itemized deductions.
“The auto loan interest deduction can reduce taxes by hundreds or thousands of dollars for eligible taxpayers, and the latest data from the Treasury Department suggests that millions of people could claim the deduction this year,” Andrew Lautz, director of tax policy at the Bipartisan Policy Center, told CBS News.
What you need to do now
Start by gathering your 2025 auto loan statements that show how much interest you paid. You will also need your vehicle’s VIN to prove it was assembled in the US
From there, fill out a Schedule 1-A form with information about your income, auto loan information and VIN, and send it in with your tax return. Although if you use a tax professional or tax software to prepare your return, the professional or software will handle filling out this form for you; you can just answer some questions.
If you’re not sure if you qualify, consult a licensed tax preparer or check the IRS guide directly.
Should this influence your decision to buy a car?
As of now, the discount runs until Dec. 31, 2028, so if you’re thinking of buying a new car in the next few years, it might fit your bill.
That said, tax experts generally caution against letting a deduction lead to a large purchase. A possible tax cut doesn’t justify buying a $50,000 car that you wouldn’t have bought otherwise.
