You're paying $749 every month on your new car loan. That's the average payment in 2025, and most of it goes toward interest at rates hovering around 6.8% for new vehicles.
I know this because Congress just passed the One Big Beautiful Bill Act in July 2025. The law created a brand-new tax deduction for auto loan interest - something that hasn't existed since the 1980s. You can now deduct up to $10,000 in vehicle loan interest per year through 2028.
The new auto loan interest deduction applies only to qualifying vehicles financed after December 31, 2024. Your vehicle must be new, assembled in the United States, and for personal use. The loan must be secured by a first lien on the vehicle. Meet those requirements and the IRS lets you deduct the interest whether you itemize or take the standard deduction.
Here's what makes this different from other tax breaks. This is an above-the-line deduction - meaning it reduces your adjusted gross income before most other deductions get calculated. That gives you tax savings on both federal returns and potentially state returns in conforming states.
The catch is income limits. Single filers start losing the deduction at $100,000 modified adjusted gross income. Married couples filing jointly start phasing out at $200,000. The deduction disappears completely at $150,000 for singles and $250,000 for joint filers.
This guide breaks down exactly what the new auto loan interest deduction is, who qualifies, how much you can save, and whether buying now makes financial sense.
How the New Auto Loan Interest Deduction Works
The deduction allows you to write off interest paid on qualifying vehicle loans from your taxable income. The maximum deduction is $10,000 per year, available for tax years 2025 through 2028.
Congress designed this as a temporary measure to stimulate domestic auto production and help middle-income buyers with affordability. The Joint Committee on Taxation estimates the deduction will cost $31 billion from fiscal years 2025 through 2034 - making it one of the top 25% costliest provisions in the entire One Big Beautiful Bill Act.
The deduction is above-the-line, which means you don't have to itemize to claim it. This matters because most taxpayers take the standard deduction. In 2025, the standard deduction sits at $15,000 for single filers and $30,000 for married couples filing jointly. You get both the standard deduction and the vehicle loan interest deduction.
Your lender tracks the interest you pay and reports it to the IRS. For 2025, lenders can provide a simple year-end statement showing your total interest paid. Starting in 2026, lenders must use Form 1098-VLI - a new IRS form specifically for vehicle loan interest reporting.
You claim the deduction on Schedule 1-A, a new attachment to Form 1040. You'll need to include your vehicle identification number on the form. The IRS uses the VIN to verify the vehicle meets the US assembly requirement.
Current Auto Loan Statistics That Make This Deduction Matter
Vehicle prices hit an all-time high in 2025. The average new car price reached $50,080 in September 2025 according to Kelley Blue Book - the first time the figure topped $50,000. That's up 3.1% from 2024.
Interest rates remain elevated. The average auto loan rate sits at 6.8% for new vehicles and 11.54% for used vehicles as of the second quarter of 2025, according to Experian. For borrowers with excellent credit (scores above 780), rates average 5.18%. For those with poor credit (scores below 580), rates hit 15.81%.
Monthly payments have climbed accordingly. The average new car payment reached $749 per month in Q2 2025. That's for a loan term averaging 68 months. Total interest paid over a typical 72-month loan at current rates adds up to approximately $9,500.
More than 80% of new vehicle buyers finance their purchases. In 2024, Americans bought approximately 15 million new vehicles. Sales of new passenger cars totaled about 2.4 million units, with the vast majority financed at dealerships.
The average amount financed for a new vehicle sits at $41,983 as of Q2 2025. For used vehicles, the average loan amount is $26,795. At a 6.8% interest rate over 60 months, a $42,000 new car loan generates approximately $3,100 in interest during the first year.
These numbers show why the deduction matters. Even at today's rates, most borrowers won't hit the $10,000 annual interest cap. But claiming $3,000 to $4,000 in deductions still saves real money - especially in the early years when interest makes up a larger portion of each payment.
Who Qualifies for the New Auto Loan Interest Deduction
You must meet several requirements to claim the deduction. Miss one and the entire deduction disappears.
Vehicle Requirements
The vehicle must be new. Used vehicles don't qualify under any circumstances. The IRS defines "new" as original use beginning with you - the taxpayer claiming the deduction.
Final assembly must occur in the United States. This requirement excludes many popular models. Honda Civics assembled in Canada don't qualify. Toyota Camrys built in Japan don't qualify. Even American brands sometimes fail this test - the Ford Maverick assembles in Mexico.
The VIN's 11th digit indicates the assembly plant location. You can also check the window sticker or the certification label on the driver's door jamb. The label states "Final Assembly Point" with the city and country.
The vehicle must weigh less than 14,000 pounds gross vehicle weight rating. Most cars, SUVs, pickup trucks, minivans, and motorcycles qualify. Heavy-duty trucks and commercial vehicles typically exceed this limit.
Personal use only. Business vehicles, fleet vehicles, and commercial use vehicles don't qualify. The vehicle must be for your personal transportation - not for business operations.
Loan Requirements
The loan must originate after December 31, 2024. Loans taken out in 2024 or earlier don't qualify. However, if you refinance an old loan during 2025-2028, the refinanced portion qualifies - but only up to the remaining balance you refinanced. Cash-out refinancing that increases the loan amount doesn't qualify for the additional amount.
The loan must be secured by a first lien on the vehicle. The vehicle serves as collateral. Unsecured personal loans used to buy a vehicle don't qualify. Second liens or subordinate financing don't qualify.
The loan cannot be from a related party. You can't borrow from family members and claim the deduction. The loan must come from a legitimate third-party lender like a bank, credit union, or auto finance company.
Income Requirements
Your modified adjusted gross income determines how much of the deduction you can actually claim:
- Single filers under $100,000: Full deduction available
- Single filers $100,000 to $150,000: Partial deduction with phase-out
- Single filers over $150,000: No deduction
- Married filing jointly under $200,000: Full deduction available
- Married filing jointly $200,000 to $250,000: Partial deduction with phase-out
- Married filing jointly over $250,000: No deduction
The phase-out works in $1,000 increments. For every $1,000 your income exceeds the threshold, your deduction drops by $200.
Calculating Your Tax Savings From the Deduction
The deduction's value depends on your tax bracket and how much interest you actually pay.
Let's work through real examples using 2025 numbers.
Example 1: Single Filer, $75,000 Income, 22% Tax Bracket
You financed a $42,000 new SUV assembled in Alabama. Your loan terms: 6.8% interest rate, 60-month term.
Year 1 interest paid: $2,723 Your income: $75,000 (under the $100,000 threshold) Tax bracket: 22% Tax savings: $2,723 × 22% = $599
That $599 reduces your federal tax bill directly. It's not a credit - it's a deduction that lowers your taxable income by $2,723, which saves you $599 in taxes at the 22% bracket.
Example 2: Married Couple, $180,000 Income, 24% Tax Bracket
You financed a $50,000 pickup truck assembled in Michigan. Loan terms: 6.5% interest rate, 72-month term.
Year 1 interest paid: $3,145 Your income: $180,000 (under the $200,000 threshold) Tax bracket: 24% Tax savings: $3,145 × 24% = $755
Both spouses work and your combined income stays under the joint filing phase-out. You get the full deduction and save $755 on your federal return.
Example 3: Single Filer, $120,000 Income - Partial Phase-Out
You financed a $45,000 sedan assembled in Ohio. Loan terms: 6.8% interest rate, 60-month term.
Year 1 interest paid: $2,913 Your income: $120,000 Income over threshold: $120,000 - $100,000 = $20,000 Phase-out calculation: $20,000 ÷ $1,000 = 20 increments Deduction reduction: 20 × $200 = $4,000 But your interest is only $2,913, so you lose: $2,913 - $2,000 = $913 remaining deduction
Your tax bracket: 24% Tax savings: $913 × 24% = $219
The phase-out significantly reduces your benefit. At $120,000 income, you're losing most of the deduction value.
Example 4: What $10,000 in Interest Actually Requires
The $10,000 cap sounds generous. But reaching it requires a massive loan.
To pay $10,000 in interest during year one, you'd need approximately:
- A loan amount of $112,000
- At 6.8% interest
- Over a 60-month term
That's more than double the average new vehicle price. Very few buyers will ever hit the $10,000 cap. The Congressional Budget Office notes this cap exists primarily to control the provision's cost, not because buyers typically pay that much interest.
Which Vehicles Actually Qualify Under the US Assembly Rule
The US assembly requirement eliminates many popular vehicles from deduction eligibility. This rule aims to support domestic manufacturing, but it creates confusion for buyers.
Popular Models That Qualify
Vehicles assembled at these US plants typically qualify:
Ford: F-150 (Dearborn, MI), Mustang (Flat Rock, MI), Explorer (Chicago, IL) GM: Silverado (Fort Wayne, IN), Corvette (Bowling Green, KY), Cadillac Escalade (Arlington, TX) Stellantis: Jeep Wrangler (Toledo, OH), Ram 1500 (Sterling Heights, MI), Dodge Durango (Detroit, MI) Tesla: Model 3, Model Y (Fremont, CA and Austin, TX) Toyota: Camry (Georgetown, KY), Tundra (San Antonio, TX), Highlander (Princeton, IN) Honda: Accord (Marysville, OH), Pilot (Lincoln, AL), Ridgeline (Lincoln, AL) Nissan: Altima (Smyrna, TN), Rogue (Smyrna, TN)
Popular Models That Don't Qualify
These vehicles assemble outside the US:
Honda Civic: Ontario, Canada Toyota Corolla: Japan Mazda CX-5: Japan Subaru Outback: Japan Ford Maverick: Mexico Volkswagen Atlas: Chattanooga, TN (qualifies), but Jetta and Tiguan: Mexico (don't qualify) BMW X5: South Carolina (qualifies), but 3 Series: Germany (doesn't qualify)
The rule creates an uneven playing field. Two identical vehicles from the same manufacturer might have different tax treatment based solely on which factory produced them.
How to Claim the Deduction on Your Tax Return
Claiming the new auto loan interest deduction requires specific documentation and forms. The process differs slightly for 2025 versus later years.
For 2025 Tax Returns (Filed in 2026)
The IRS granted transitional relief for 2025. Lenders don't have to use the official Form 1098-VLI yet. Instead, your lender must provide a statement showing:
- Total interest you paid during 2025
- Your loan origination date
- Vehicle identification number
- Confirmation the vehicle is a qualifying passenger vehicle
This statement can come as a year-end summary, through your online account portal, or on monthly statements that show cumulative interest paid.
You'll need to:
- Gather your lender's interest statement
- Verify the interest amount matches your loan payment records
- Complete Schedule 1-A (Form 1040), Part IV
- Enter your vehicle's VIN on the schedule
- Calculate any income phase-out reduction
- Attach Schedule 1-A to your Form 1040
For 2026-2028 Tax Returns
Starting with 2026 returns, lenders must use Form 1098-VLI. This form works like Form 1098 for mortgage interest. Your lender will send you the form by January 31 of the following year if you paid $600 or more in qualifying interest.
Form 1098-VLI will show:
- Box 1: Total interest received
- Box 2: Outstanding principal balance
- Box 3: Loan origination date
- Box 4: Vehicle identification number
- Box 5: Vehicle year, make, and model
- Box 6: Final assembly location
You'll use the information from Box 1 to claim your deduction on Schedule 1-A. The IRS receives a copy of the form directly from your lender, so the numbers must match exactly.
What Documents to Keep
Save these records with your tax return:
- Form 1098-VLI (or 2025 alternative statement)
- Your loan agreement
- Monthly payment statements
- Vehicle purchase documents showing the VIN
- Window sticker or door jamb label proving US assembly
- Any correspondence about the loan or interest amounts
The IRS can audit returns for three years in most cases. Keep your documentation at least that long. If you claimed large deductions relative to your income, consider keeping records for six years.
When the Deduction Expires and What Happens to Your Loan
The new auto loan interest deduction has a hard expiration date. After tax year 2028, it's gone - no matter when you took out your loan.
The 2025-2028 Window
You can claim the deduction for these tax years:
- 2025 (filed in early 2026)
- 2026 (filed in early 2027)
- 2027 (filed in early 2028)
- 2028 (filed in early 2029)
After December 31, 2028, interest paid on vehicle loans becomes non-deductible personal interest again. This includes loans originated during the 2025-2028 window that you're still paying after 2028.
Impact on Loan Timing
Finance a vehicle in January 2025 with a 60-month loan, and you'll pay interest through December 2029. You can deduct the interest paid from January 2025 through December 2028 - 48 months. The interest you pay in 2029 doesn't qualify.
Finance that same vehicle in December 2028, and you get only one month of deductible interest (December 2028). The remaining 59 months of interest payments aren't deductible.
This creates pressure to finance sooner rather than later if you're planning a new vehicle purchase anyway. Earlier purchases maximize the number of deduction years.
Will Congress Extend the Deduction?
The Congressional Budget Office estimated that making the deduction permanent would increase its 10-year cost by $66 billion (for a total of $97 billion). That's a significant budget impact.
Whether Congress extends the deduction beyond 2028 depends on future political priorities and budget constraints. The provision was designed as a temporary stimulus measure, not a permanent tax code change.
Planning your purchase based on a potential extension is risky. Use the four-year window you have now.
State Tax Treatment of the Deduction
The federal deduction is straightforward. State tax treatment varies depending on how your state structures its tax code.
States That Conform to Federal AGI
Most states start their tax calculations with federal adjusted gross income. If your state uses federal AGI as the starting point, the vehicle loan interest deduction automatically flows through because it reduces your federal AGI.
States in this category include California, New York, Massachusetts, Oregon, and many others. You'll see the state tax benefit without any special action - your lower federal AGI means lower state taxable income.
States That Don't Conform Automatically
Some states don't adopt federal tax changes without specific legislation. They might use federal AGI from a prior year, or they might add back certain federal deductions.
Check with your state tax agency to see if they've conformed to the vehicle loan interest deduction. If they haven't, you'll get the federal benefit but zero state tax savings.
States With No Income Tax
Nine states have no individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. The federal deduction helps you if you live in these states, but there's no additional state benefit since you don't pay state income tax anyway.
Community Property States
Community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) have special rules for married couples filing separately.
If you're married filing separately and live in a community property state, income and deductions might split between spouses according to state law - even if only one spouse is on the loan. Consult a tax professional for guidance specific to your situation.
Common Mistakes That Disqualify Your Deduction
Small errors can eliminate your entire deduction or trigger IRS scrutiny. Avoid these common mistakes.
Wrong VIN or Missing VIN
The IRS requires your vehicle identification number on Schedule 1-A. Enter the wrong VIN and the IRS can't verify US assembly. The system will flag your return for review.
Copy the VIN exactly as it appears on your title, registration, and loan documents. All 17 characters must match. Don't guess or estimate any digit.
Claiming Interest on a Used Vehicle
The deduction applies only to new vehicles. If you bought a 2024 model in 2025, it might technically be "new to you" - but if someone else owned it first, it's used in the IRS's definition.
The requirement states "original use must begin with the taxpayer." That means you must be the first owner. Even a dealer demo or loaner vehicle with a few thousand miles doesn't qualify if it was titled to someone else first.
Foreign Assembly Vehicles
Many buyers don't realize their vehicle assembles outside the US until they try to claim the deduction. Check the assembly location before you buy if you want the tax benefit.
The window sticker shows final assembly point. The door jamb certification label also lists it. If either says Mexico, Canada, or any country other than the United States, you can't claim the deduction.
Leased Vehicles
Leasing doesn't involve borrowing money to purchase a vehicle. You're renting from the leasing company. No loan means no loan interest deduction.
This is true even if your lease payments include a "money factor" that's essentially interest. Lease payments don't qualify under this provision.
Business Use Vehicles
The deduction applies only to personal use vehicles. If you use the vehicle primarily for business, you can't claim this deduction.
You might be able to deduct the business portion of vehicle expenses through normal business deduction rules. But the new personal vehicle loan interest deduction doesn't apply to business vehicles.
Overstating Interest Paid
Claim more interest than you actually paid and you're asking for trouble. The IRS receives Form 1098-VLI directly from your lender (starting in 2026). Any discrepancy between what you claim and what your lender reported triggers automatic review.
For 2025, save all payment records to prove your interest amount if questioned. Don't inflate the number hoping the IRS won't check.
Ignoring the Phase-Out
Taxpayers with income slightly over the threshold sometimes claim the full deduction without applying the phase-out calculation. The IRS will catch this error and either reduce your deduction or deny it entirely depending on your income.
Schedule 1-A includes the phase-out calculation. Follow the form instructions exactly.
Should You Buy Now or Wait?
The deduction creates a limited-time incentive to purchase. But buying a vehicle just for a tax break rarely makes financial sense.
When Buying Now Makes Sense
You already planned to purchase a new vehicle within the next few years. The deduction sweetens a decision you'd make anyway - it doesn't change the fundamental economics.
You qualify for a low interest rate. Good credit scores (above 720) unlock rates around 5% to 6%. At those rates, the deduction covers 20% to 30% of your interest cost in the first year.
Your income falls under the phase-out threshold. Single filers under $100,000 and joint filers under $200,000 get the full benefit. Above those amounts, the value drops quickly.
You're considering a US-assembled vehicle already. If your preferred models happen to qualify, the deduction adds value without changing your purchase decision.
Current inventory and incentives favor buyers. Some manufacturers offer aggressive rebates to move inventory. Combine manufacturer incentives with the tax deduction for maximum savings.
When Waiting Makes More Sense
You're stretching your budget to buy. Monthly payments shouldn't exceed 15% to 20% of your take-home pay. A tax deduction that saves $50 to $100 per month doesn't justify an unaffordable payment.
Interest rates might drop significantly. The Federal Reserve cut rates in September and October 2025. If rates drop another 1% to 2%, the interest savings could exceed the tax benefit.
Your preferred vehicle doesn't qualify. Don't switch to a less desirable vehicle just because it qualifies for the deduction. Buy what you actually want - the tax savings don't justify settling.
You're over the income phase-out. Single filers earning over $150,000 or joint filers over $250,000 get zero benefit. The deduction doesn't matter to your tax situation.
Vehicle prices might stabilize or drop. Average prices hit all-time highs in 2025. If tariffs ease or inventory increases, prices could moderate. Waiting might save more through lower purchase prices than you'd gain from the deduction.
Alternative Strategies for Maximizing the Benefit
Beyond basic eligibility, several strategies can increase your tax savings from the deduction.
Timing Your Purchase Date
December 2025 versus January 2026 changes how many deduction years you get. Finance in December 2025 and you could claim interest from four calendar years (2025-2028). Finance in January 2026 and you get three years (2026-2028).
The difference is small but real. An extra month of deductible interest adds $200 to $300 in deductions for most loans.
Larger Down Payment vs. Maximum Financing
Conventional financial advice says put down 20% or more. But if you're after tax deductions, financing more increases your interest paid and your deduction amount.
This strategy makes sense only if:
- You have excellent credit and get low rates
- Your income stays under the phase-out threshold throughout the loan term
- You're disciplined about investing the down payment money elsewhere at higher returns
For most people, the interest cost exceeds the tax savings. A larger down payment usually makes more financial sense despite the smaller deduction.
Married Filing Separately Considerations
Married couples usually file jointly. But if one spouse has high income and the other has low income, filing separately might preserve some deduction benefit.
The phase-out for married filing separately uses the single filer thresholds - $100,000 to $150,000. If one spouse earns $90,000 and the other earns $140,000, filing separately puts the lower-earning spouse under the threshold.
This strategy often backfires because married filing separately loses other tax benefits. Run the numbers both ways before deciding.
Bunching Strategy for Multi-Vehicle Households
The $10,000 cap applies per taxpayer per year - not per vehicle. If you have two qualifying vehicles with two loans, you can combine the interest from both toward the $10,000 limit.
Most households won't hit $10,000 total even with multiple vehicles. But if you're planning two vehicle purchases over the 2025-2028 window, timing them strategically can maximize deductions.
The Bigger Financial Picture Beyond the Deduction
The tax deduction is one factor in vehicle financing decisions. Don't let it override sound financial planning.
Total Cost of Ownership Matters More
A $500 annual tax savings doesn't fix an unaffordable payment. Focus first on:
- Monthly payment fits your budget comfortably
- Down payment doesn't deplete your emergency fund
- Insurance costs work with your overall budget
- Maintenance and fuel costs fit your lifestyle
- Vehicle meets your actual transportation needs
The deduction improves an already sound decision. It doesn't rescue a bad one.
Interest Rate Impact Exceeds Deduction Value
A 1% interest rate difference costs or saves more than the tax deduction provides. On a $40,000 loan over 60 months:
- At 6.8% interest, you pay $7,823 total interest
- At 5.8% interest, you pay $6,668 total interest
- That's $1,155 less interest paid
The tax deduction might save you $400 to $600 annually. But getting a rate 1% lower saves you $1,155 over the life of the loan - more than two years of deductions.
Shop for the best rate before worrying about the deduction.
Opportunity Cost of Large Purchases
Every dollar spent on a vehicle is a dollar not invested elsewhere. In 2025, with markets volatile and interest rates elevated, the opportunity cost deserves attention.
If you're financing primarily to claim the deduction rather than because you can't afford the purchase, consider what investing that money elsewhere might earn. Stock market returns, high-yield savings accounts, or paying down higher-interest debt might provide better returns than the tax savings.
What Happens If the Rules Change
Tax law changes constantly. The One Big Beautiful Bill Act passed in July 2025, but modifications could come through future legislation.
IRS Guidance and Clarifications
The IRS continues issuing guidance on the deduction's details. Open questions as of late 2025 include:
- Whether lease buyouts qualify
- How refinanced loans beyond the original balance are treated
- Specific documentation requirements for proving US assembly
- State-by-state conformity decisions
Additional IRS notices, revenue rulings, or regulations could clarify or modify how the deduction works. Stay informed through tax professionals or IRS publications.
Legislative Changes
Congress could extend the deduction beyond 2028, modify the income thresholds, change the US assembly requirement, or adjust the $10,000 cap.
Any changes would typically apply to future tax years, not retroactively. If you finance a qualifying vehicle during 2025-2028, you should get the benefit for those years regardless of future law changes.
What You Should Do Now
Don't delay decisions hoping for better rules. Use the benefit available today. If you're planning a vehicle purchase that qualifies, make the purchase and claim the deduction according to current law.
The new auto loan interest deduction rewards buyers who finance qualifying vehicles during a specific four-year window. Calculate whether you qualify, understand your potential tax savings, and decide if buying now fits your financial situation. The deduction improves the economics of vehicle financing - but it shouldn't drive purchases you weren't already planning.
Contact us today to get started.