Can I deduct car loan interest on my 2025 tax return?

Yes, for qualifying vehicle loans, the One Big Beautiful Bill Act (OBBBA) created a new deduction for interest paid on car loans used to purchase a qualifying new vehicle in 2025 through 2028. This is one of the most significant new personal deductions in years.

The basics:

• You can deduct up to $10,000 per year in car loan interest
• The vehicle must be purchased new (not used)
• The vehicle must be assembled in the United States
• It must be purchased for personal use (business vehicles have separate rules)
• The deduction is claimed as an above-the-line deduction on Schedule 1-A

Income phase-out: The deduction phases out for higher earners:

• Single filers: phases out between $100,000–$150,000 MAGI
• Married filing jointly: phases out between $200,000–$300,000 MAGI
• Above the upper limit, no deduction is available

What qualifies as a "qualified vehicle"? The IRS issued guidance specifying that:

• The vehicle must be new (not used or leased)
• Final assembly must have occurred in the United States
• The loan must be taken out between 2025 and 2028

Important for 2025 transition year: The IRS issued Notice 2025-57 providing transition relief to lenders who may not separately report qualifying car loan interest on Form 1098-C for 2025. Keep your own records of loan statements to substantiate your deduction.

What about used cars or leases? Used vehicles and leased vehicles do not qualify for this deduction. Only newly purchased, US-assembled vehicles financed with a loan are eligible.

This deduction can be taken regardless of whether you itemize or take the standard deduction, making it accessible to nearly all car buyers in the eligible income range.