Tax Talk: Auto Loan Interest Deduction (New for 2025)
By Patrick Diamond, CFP®
New for Tax Year 2025: Car Loan Interest Deduction — What You Need to Know
A new provision taking effect for the 2025 tax year offers a temporary tax benefit to qualifying vehicle owners: an above-the-line deduction for car loan interest, capped at $10,000. This means eligible taxpayers may be able to reduce their adjusted gross income (AGI) directly — potentially lowering taxable income and improving eligibility for other deductions or tax credits.
But not every vehicle or loan qualifies. The IRS has placed very specific criteria around this deduction, so it’s important to review the rules carefully before you take action.
Eligibility Requirements
To claim this deduction, ALL of the following must be true:
Must Meet the Following Criteria
Type of vehicle: New vehicle only — used cars do NOT qualify
Use of vehicle: Must be for personal use (not business or commercial purposes)
Loan type: Interest must be from a loan (not a lease) — leased vehicles are explicitly excluded
Assembly location: Vehicle must have final assembly in the United States
Deduction limit: Maximum of $10,000 of interest paid may be deducted
Tax return type: Above-the-line deduction — available even if you don’t itemize
Income Phase-Out Rules
The deduction phases out once you exceed the following Modified Adjusted Gross Income (MAGI) levels:
Documentation
Documentation is a good idea. If you qualify, you’ll want to keep:
Proof of U.S. final assembly
Loan statements showing annual interest paid
IRS form instructions once released (likely in early 2026 for 2025 tax filing)
Purchase contract showing that the vehicle was new at time of sale
Next Steps for Taxpayers
If you think you may qualify:
Verify assembly location — ask the dealer or check the window sticker (look for “final assembly”).
Confirm the vehicle is new — demonstrators and used vehicles will not qualify.
Finance (don’t lease) if you want to make use of this deduction.
Track interest payments
Talk with your tax professional before year-end to determine eligibility.
✔️ Final Takeaway
This deduction is temporary, limited, and targeted — but for many taxpayers, it provides a meaningful opportunity in 2025 to reduce taxable income and offset rising borrowing costs. Additional IRS guidance is TBD.
*Disclaimer: This blog post is for educational and informational purposes only and does not constitute tax or legal advice.