This tax season, there's a new deduction for interest on car loans

There's a brand-new tax deduction in place this filing season: Taxpayers who bought a new car in 2025 can, in some cases, deduct interest on their auto loan.

The deduction was created by the One Big Beautiful Bill Act, which also removed taxes on tips and overtime for qualifying workers, and — relevant to new car shoppers — eliminated a tax credit for buying electric vehicles.

Here's what taxpayers should know about the new tax deduction.

The deduction applies to new cars purchased after Dec. 31, 2024

If your car loan was taken out before that date, you won't be able to benefit.

If you purchased a used car, you're also out of luck. (That means the people who are typically hit the hardest by interest on auto loans — used vehicle buyers with poor credit — will not feel any benefit from this provision.)

But if you bought a new car in 2025, read on.

The highest-income households will not qualify 

The deduction phases out for single tax filers with a modified adjusted gross income, or MAGI, of $100,000 or more. The phaseout begins at $200,000 for a married couple filing jointly.

If you make six figures, you may still be able to benefit. MAGI is calculated after certain deductions from your gross income, like tax-deductible retirement contributions. And because the deduction is phased out gradually, if you are close to the cutoff you might still be able to deduct a portion of the interest you paid.

The vehicle must have been assembled in the United States 

To get the deduction, a vehicle must have gone through its final assembly process in the United States, which you can determine using your vehicle identification number.

Mark Gallegos, a tax partner at Porte Brown Wealth Management in Chicago, says he's had to remind clients that buying a vehicle "made in the U.S." is not the same as simply buying an "American" brand. A Ford, Chevy or Jeep might be assembled outside the U.S., he says, while "you may have a Japanese or a Korean or a German manufacturer, and that may be final assembly in the U.S." There's no substitute for checking the VIN.

The vehicle also has to be for personal use, not for a business.

If you and the vehicle both qualify, you can deduct up to $10,000 in interest paid per year

For this tax season, you'll have to look at your paperwork for your auto loan — check your last statement for 2025 — to see how much interest you paid in total. You will not get a separate tax document in the mail from your lender.

Gallegos also reminds clients that a deduction is not the same as a tax credit. A tax credit reduces how much tax you must pay, dollar for dollar, like a refund or a rebate. A deduction reduces how much of your income is taxable, which means your actual savings are smaller than the deduction.

For example, if you paid $1,000 in interest, and can deduct all of it, "That doesn't mean I get $1,000 back in my pocket," Gallegos says. "It's cents on the dollar." Exactly how much you save depends on your tax bracket; if you're in the 22% bracket, for instance, that $1,000 deduction is worth $220.

The deduction is available even if you are taking the standard deduction 

Unlike most tax deductions — including the mortgage interest tax deduction — this one is available for taxpayers who are taking the standard deduction and not otherwise itemizing their deductions.

That's a nice perk, Gallegos says, and expands the number of people who might benefit.

The policy is not likely to be a major boost to domestic manufacturing 

Under the Biden administration, the federal government leaned heavily on tax policy to incentivize domestic manufacturing, particularly of electric vehicles. A hefty tax credit for buyers of American-made EVs motivated companies to build plants in North America.

Now, under the Trump administration, those tax credits are gone — but high tariffs on vehicles and parts from overseas are serving as a different kind of pressure to get companies to shift production to the U.S.

Will this tax deduction add even more pressure? Probably not, says Ivan Drury, head of insights at the automotive data company Edmunds.

Yes, it's specific to U.S.-built cars — but it's just not that big of an incentive, he says. It doesn't apply to leases and provides no benefit at all to buyers who used 0% financing or didn't take out loans. It helps some buyers for sure, he says, but it's more of a nice-to-have than something that is likely to sway buyers' decisions when weighing a car that's built in the U.S. against one that isn't.

As a result, he says, it's not likely to be that motivating to automakers. "This isn't going to cause any automaker to suddenly say, 'Hey, two years from now for the sole purpose of this tax deduction, we'll start building that in the United States," he says.

But it will be a modest financial boost to some buyers, he says. And, he points out, "This isn't bad for anybody." Even if you don't qualify, you're no worse off than you were before.
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