How to Claim the Car Loan Interest Deduction on Your Taxes

Drivers who bought cars after Dec. 31, 2024, they may now be eligible to claim the new car loan deduction, which is a key part of the GOP tax law signed last year.

This deduction allows eligible car owners to deduct up to $10,000 a year in interest payments from their taxable income, potentially saving hundreds of dollars. The auto loan interest deduction should “stimulate domestic auto production” and make new cars more affordable for working Americans, as President Donald Trump said when announcing the idea in the final month of his 2024 campaign.

The final version, signed into law in July 2025 in the One Big Beautiful Bill Act, comes with significant limitations and eligibility criteria. Don’t expect fitness if you’re a high-income earner driving an exotic sports car.

But middle-income new car owners in the U.S. will benefit, and administration officials are trying to revive excitement about the deduction this tax season as part of a broader celebration of what could be a record year for refunds.

“For millions of Americans, a car isn’t a luxury, it’s how you get to work, school, and childcare,” Treasury Secretary Scott Bessent wrote in a recent X column. “This deduction helps lower monthly expenses.”

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How to claim a car loan interest deduction

To claim the car loan interest deduction, eligible car owners will need to fill out a tax deduction form created by the new tax law. The savings will eventually come back to you in the form of an additional tax refund (or less tax if you owe the IRS).

In December, the IRS issued guidance on claiming the car loan interest deduction for the 2025 tax year. The organization advised lenders that they do not need to use the new tax form this season to help people who want to be withheld. However, lenders had to present statements by the end of January detailing the fair interest paid by borrowers in 2025.

According to Kelley Blue Book, this statement of interest and the vehicle identification number (VIN) are the two main things needed to prepare the Schedule 1-A form, also known as the “supplementary deduction form”, and your tax return. This tax form also includes “tax not on tips” and “tax withheld on overtime”, as well as “high bonus.”

The new car loan interest deduction is available to both itemized and non-itemized filers, meaning you can claim both the standard deduction and the car interest deduction on the same tax return.

The deduction only applies to the interest, not the principal, on your loan, and an analysis by Cox Automotive shows that a vehicle would need at least $130,000 for the owner to deduct the full $10,000.

Who is eligible for the car loan interest deduction?

The car loan interest deduction is limited to income over $100,000 for single filers and double that amount ($200,000) for joint filers.

For single filers, the deduction is reduced by $200 for every $1,000 of adjusted gross income, or MAGI, above the $100,000 mark. That means the deduction is not available for a single filer with income over $150,000.

With the current average new car price just over $49,000, the new car market is geared toward high earners. Most new car buyers simply earn too much to qualify for this deduction due to the income freeze. (There is no used car tax deduction, and new leased cars are also not eligible for this tax benefit.)

Officials say the seizure is meant to support American auto operations. To qualify, the vehicle’s final assembly must be in the U.S. According to IRS guidance, “the final assembly location is listed on the vehicle information label attached to each vehicle at the dealer’s location.”

The information can also be looked up using the National Highway Traffic Safety Administration’s VIN Decoder.

The deduction is implemented in the 2028 tax year, leading Kelley Blue Book to recommend that buyers in the market for a new car include the US convention authority in their research.

Other rules: Car loans must have an origination date after Dec. 31, 2024; the vehicle must be a passenger vehicle under 14,000 pounds; and the vehicle must be used for personal use at least 50% of the time.