New Car Loan Interest Deduction: Which Vehicles and Buyers Qualify
The Trump 2025 tax overhaul includes a temporary tax deduction for auto loan interest. How does it work?
Last year, data show Americans drove away from dealerships with more than 16 million new vehicles, with roughly 80% of buyers reportedly relying on financing to purchase.
So far in 2026, average car prices are about $50,000, according to Kelley Blue Book, with interest rates for car loans hovering around an average of 7.0%.
For a 5-year loan, that roughly translates to $262 a month just in interest. For those who need a new car, those costs can strain budgets.
Now, a new tax break could ease that burden by allowing borrowers to deduct auto loan interest from their taxes. Trump’s 2025 tax law offers a tax deduction for car loan interest.
But while the provision sounds like it would provide savings, it’s important to note that not every car or buyer will qualify for the tax benefit.
So, if you’re thinking about buying a new car, here’s what you need to know.
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‘Big, beautiful bill’ car loan interest deduction
Trump and the GOP's new tax law, known by some as the "big beautiful bill became law on July 4.
That $3.4 trillion legislation primarily extends or makes permanent tax breaks from Trump’s 2017 Tax Cuts and Jobs Act (TCJA). But it also offers some new tax breaks, one of which involves vehicles.
Here’s how the auto loan interest tax deduction works:
- The measure temporarily lets car buyers write off up to $10,000 a year in interest paid on qualifying auto loans
- The tax break starts with purchases made in 2025 and runs through 2028.
- You don't have to itemize to claim the deduction.
But not every buyer or vehicle will qualify.
- To qualify, the car must be new, for personal use, and meet a "final assembly" in the United States requirement — a rule some industry manufacturers say could exclude many popular imports. (Think popular models from Honda, Hyundai, Nissan, and Toyota.) More on that below.
- Cars, minivans, vans, SUVs, pickup trucks, or motorcycles, weighing less than 14,000 pounds qualify, according to the IRS. ATVs, trailers, campers, used cars, and vehicles assembled abroad are not eligible.
- The deduction is limited to $10,000 per year and phases out for individuals earning more than $100,000 or couples making over $200,000. So, higher-income households will see less benefit.
- The deduction applies to new cars with loans originating after December 31, 2024, and only if the vehicle has final assembly in the U.S.
Remember: These changes apply to loans taken out in 2025 and after, but just for three years, through 2028.
The IRS also notes: "If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction."
What is U.S. 'final assembly'?
The IRS recently issued a fact sheet stating that the place of final assembly for purposes of the car loan interest deduction is the location listed on the vehicle's information label.
How can you find that information?
- The IRS says that every new vehicle at the dealership should have an information label that lists the final assembly location.
- You can also look up the Vehicle Identification Number (VIN).
- The National Highway Traffic Safety Administration VIN decoder tool could also be useful in indicating where your car was assembled.
Who benefits from the auto loan interest deduction?
Supporters of the federal auto loan interest deduction argue it provides direct financial relief at a time when both new vehicle prices and interest rates remain elevated.
Originally introduced in legislative proposals like the Made in America Motors Act (Rep. Bill Huizenga, R-Mich.) and the USA CAR Act (Sen. Bernie Moreno, R-Ohio), the benefit was designed to fulfill a Trump campaign pledge to reward domestic auto manufacturing while easing household debt burdens.
Because the policy is structured as an above-the-line deduction (claimed on Schedule 1-A), advocates tout that taxpayers can write off qualifying car loan interest whether they take the standard deduction or itemize. (To qualify, vehicles must be new, weigh under 14,000 pounds, and undergo final assembly in the U.S.)
Meanwhile, some economic analysts question how much net relief the tax break provides to the average car buyer.
For example, an analysis from Cox Automotive indicated that a buyer paying around $2,000 in annual interest could save a few hundred dollars on their tax return. (The actual amount saved would depend on their marginal tax bracket, but tax savings alone rarely shift overall purchasing behavior given the total cost of buying and financing a new vehicle.)
Other considerations:
Income Phaseouts: The deduction caps at $10,000 annually and phases out for single filers earning between $100,000 and $150,000 (or $200,000 to $250,000 for joint filers). As a result, higher earners above these limits receive no benefit, while lower-income households with minimal tax liability see limited marginal savings.
Exclusions: Buyers purchasing used vehicles, imported models, or leasing vehicles are entirely excluded.
And then there’s the cost: The Joint Committee on Taxation estimates the provision would cost over $57 billion in lost federal revenue through its 2028 sunset, raising questions about its broader economic trade-offs.
Tax Filing: Your interest statement and Schedule 1-A
To claim the new auto loan interest deduction, taxpayers must be prepared to file a specific tax form and provide key documentation.
- For tax years 2025 through 2028, the IRS says you will claim the deduction by filing a new form with the IRS: Schedule 1-A (a new attachment to your Form 1040).
- To properly claim the benefit, you must include the Vehicle Identification Number (VIN) of the qualified vehicle on your tax return.
- You may want to confirm your interest total by requesting a statement from your lender.
What about electric vehicles?
If you purchased an eligible EV before September 30, 2025, and haven't yet filed your 2025 tax return due to a filing extension, electric vehicles qualify for the car loan interest deduction, provided they meet the same requirements as other vehicles under the 2025 Trump tax law.
- Under federal tax rules enacted in 2025, qualifying electric vehicles (EVs) and plug-in hybrid electric vehicles (PHEVs) are eligible for the auto loan interest deduction.
- The vehicle must be purchased new, weigh under 14,000 pounds, and undergo final assembly in the United States.
- Taxpayers who purchased and took delivery of an eligible new U.S.-assembled EV on or before September 30, 2025, can benefit from both incentives on their 2025 tax filings.
For EV purchases made after September 30, 2025, the federal EV tax credit is no longer available.
Buying a car: Bottom line
Even with the car loan tax deduction, car buyers shouldn’t lose sight of the bigger financial picture.
The price of the car, interest rates, insurance, upkeep, and any new fees all add up quickly. It’s also important to keep tabs on your credit score, since that can make a big difference in what you pay over the life of your loan.
No matter what tax breaks are on the table, it’s worth taking the time to run the numbers, shop around for the best financing, and make sure your car purchase fits your needs and budget.
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