Starting 2025 with a Deduction for Car Loan Interest
What It Means for You, Who Qualifies, and How Much You Can Deduct on Your 2025 Tax Return?
What Is the New Car Loan Interest Deduction?
Beginning with your 2025 federal tax return, the IRS now allows a new deduction for interest paid on qualifying car loans. This deduction was created under the One Big Beautiful Bill Act (OBBBA) and is one of the most meaningful tax benefits for working families in years.
If you financed a vehicle in 2025 or later, you may be able to deduct a portion of the interest you paid — but only if the vehicle meets specific IRS requirements and your income falls within the allowed range.
This guide breaks everything down in plain English so you can understand whether you qualify and how much you may be able to deduct.
What Is the New Car Loan Interest Deduction?
Under OBBBA, taxpayers may now deduct interest paid on a qualifying auto loan, but only for vehicles that meet strict IRS criteria.
This is a real, above‑the‑line deduction, meaning:
You can claim it even if you take the standard deduction
It reduces your Adjusted Gross Income (AGI)
It may increase your refund or lower your tax bill
It applies to tax years 2025 through 2028
This deduction is designed to support American manufacturing and help working families afford reliable transportation.
What Vehicles Qualify?
The IRS defines a qualifying vehicle as one that:
Was assembled in the United States, and
Was purchased new (not used), and
Was financed with a qualifying auto loan, and
Is used primarily for personal transportation (not business‑only use)
Vehicles that do not qualify:
Used vehicles
Leased vehicles
Vehicles assembled outside the U.S.
Vehicles purchased before 2025
Vehicles used 100% for business (those follow business‑use rules instead)
If your vehicle was assembled in the U.S. and purchased new in 2025 or later, you may qualify.
How Much Can You Deduct?
The IRS sets annual caps on how much interest you can deduct.
Maximum Deduction Amounts
Up to $5,000 for Single, Head of Household, or Married Filing Separately
Up to $10,000 for Married Filing Jointly
These are maximums — your actual deduction depends on:
How much interest you paid
Whether your vehicle qualifies
Your income level
Income Phaseouts (Who Gets the Full Deduction)
The deduction begins to phase out at higher income levels.
Full deduction generally available if:
Your Modified AGI is under $100,000
Phaseout range (based on IRS guidance):
Begins around $100,000
Fully phased out around $150,000
Most middle‑income households will qualify for the full deduction.
What Counts as Deductible Interest?
The deduction applies to:
Interest paid on a qualifying auto loan
For a new, U.S.-assembled vehicle
Purchased in 2025 or later
What does not count:
Principal payments
Loan fees
Dealer add‑ons
Extended warranties
Gap insurance
Refinanced loans from pre‑2025 purchases
Interest on business‑use vehicles (those follow Schedule C rules)
Only the interest portion of your monthly payment qualifies.
How to Know Whether Your Vehicle Was Assembled in the U.S.
The IRS allows several verification methods, including:
The window sticker (lists final assembly location)
The VIN decoder on NHTSA.gov
Manufacturer documentation
Dealer purchase paperwork
If the final assembly location is in the United States, the vehicle meets the requirement.
How to Calculate Your Deduction
Your Form 1098 from the lender will show the total interest paid for the year — but it will not tell you whether the vehicle qualifies.
To calculate your deduction, we must:
Verify the vehicle’s final assembly location
Confirm the purchase date
Confirm the loan is a qualifying auto loan
Total your interest paid for the year
Apply the IRS deduction cap
Apply the income phaseout rules
Document eligibility for IRS compliance
This is not something most taxpayers can do accurately without professional review.
Why You Should Contact Avari Tax Before Filing
This deduction is new, technical, and easy to miscalculate.
At Avari Tax & Financial Services, we:
Verify whether your vehicle qualifies
Review your loan documents and interest statements
Calculate your exact deductible amount
Apply the correct income phaseout rules
Ensure your return is accurate and compliant
Maximize your refund under the new law
Explain everything in plain English
If you purchased a new vehicle in 2025, this deduction could put real money back in your pocket — but only if it’s handled correctly.
Ready to See If You Qualify?
If you financed a new, U.S.-assembled vehicle in 2025, you may be eligible for a significant new deduction.
Let us help you calculate it accurately and make sure you get every dollar you’re entitled to.
Visit AvariTax.com or contact us directly to get started.
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