No Tax on Car Loan Interest

Published August 1, 2025

This page is for people seeking details on the new rule. Find out if the purchase you made, or the purchase you’re thinking of making, qualifies. Understand the size of the benefit, to see whether it affects your purchase decision. Is it big enough to allow you to buy a more expensive car? Or to change your choice of car if the one you prefer doesn’t qualify?

Overview

No tax on car loan interest is not some handsome new tax benefit for all car buyers. It applies only to certain loans used to buy certain cars by people with income within certain ranges. If you happen to be in the sweet spot where the benefit is greatest, it can produce meaningful savings. People with income outside that range may still benefit, but they aren’t likely to see much change in their spendable income.

The sweet spot for no tax on car loan interest

Before we get into all the grimy details of this deduction, you probably want to know if you’re in the sweet spot I mentioned. For singles, it’s people with income in the range of approximately $64,500 to $100,000. Double those amounts for couples filing jointly.

The income we’re looking at here is modified adjusted gross income (MAGI). Certain items, such as deductible IRA contributions, are considered adjustments that can cause MAGI to be smaller than your total earnings. If you excluded foreign earned income, income from U.S. possessions, or income from Puerto Rico, add this back to get MAGI.

Here’s the logic behind these sweet spot numbers. The car loan interest deduction begins to phase out when income is above $100,000. The takeback is pretty steep: $200 for every $1,000 by which your income exceeds that limit.

Example. You qualify for the deduction and pay $2,500 in car loan interest during the year. Your income is $110,000, which is $10,000 over the limit. That means $2,000 of the deduction goes away. You claim only $500, for a tax benefit of about $110. Don’t spend it all in one place!

As the example demonstrates, you can claim this deduction with income above $100,000. Yet it will be reduced, and possibly eliminated, as income grows beyond that level.

That explains why the sweet spot tops out around $100,000 in income. Why the lower limit of $64,500?

You can claim the “no tax on car loan interest” deduction with less than $64,500 in income. Here’s the problem. The standard deduction for a single taxpayer is $15,750. With $64,500 in income, you would have $48,750 in taxable income. That’s close to the level where the federal income tax rate changes from 12% to 22%. With income below $64,500, most or all of your car loan interest deduction will be taken against income that would be taxed in the 12% bracket. (Tax brackets and other key figures, including the standard deduction, can be found in our Reference Room.

Example. Your income is $63,000. You get a standard deduction of $15,750, leaving you with taxable income (assuming no other deductions) of $47,250. At that level you can certainly use the “no tax on car loan interest” deduction. Yet your tax bracket is just 12%. Deducting $1,000 of interest paid in the year saves you only $120.

Income above that level moves you into the 22% tax bracket, where the same $1,000 deduction is worth $220, nearly twice as much.

Two more limitations

Two other rules limit the value of this deduction.

$10,000 limit. The maximum deduction you can claim in any year is $10,000. The same limit applies to single taxpayers and couples filing jointly. The limit is pretty generous, even for a couple with two cars. If you pay more than this amount in car loan interest per year you may be a good candidate for financial counseling.

2029 expiration. This tax benefit comes with an expiration date. As the law now stands, it will be available for years 2025 through 2028. Depending on when you buy and the length of your loan, you may end up deducting only a fraction of the total interest you pay on the loan.

Example. You buy a car in July, 2027, taking out a 6-year loan for $40,000 at 8%. Total interest over the term of this loan will be about $10,500, but your total deductions in 2027 and 2028 come to about $4,100.

Expiration of this deduction may be less costly than it appears. That’s because interest payments on a loan are front-loaded. In a six-year loan, more than 70% of the interest payments fall in the first 36 months.

The 2029 expiration will happen unless Congress passes another law extending this benefit. Will Congress do so? My crystal ball is cloudy.

How much benefit?

Seeing all this, you may wonder whether the benefit you can expect from the “no tax on car loan interest” deduction is great enough to make a difference in your car purchase plans. Should you buy a new car when you were planning to buy used? Switch from the car you really want, because it wasn’t assembled in the U.S.? Buy a more expensive model, because the after-tax cost of the loan payments will be lower?

It seems unlikely that this benefit could tip the scale on any of these choices unless the scale was previously nearly perfectly balanced. Relative to the cost of a new vehicle, the benefit doesn’t appear to be large enough to alter a buyer’s preference.

Example. You buy a car right after the new tax law was enacted, in July 2025. You put 20% down and take out a six-year loan for $30,000. Your income is in the sweet spot described earlier, and you expect it to remain there for the next three years. That means all your deductions will go against income that would otherwise be taxed at 22%. Your total tax benefit through 2028, the last year before the benefit is set to expire, comes to about $1,400. The benefit is spread over four years, so it amounts to just a few hundred dollars a year. Is that enough to choose a different car from the one you want?

Bear in mind that this is a best case scenario. If your income climbs (or falls) out of the sweet spot, some or all of the benefit from this deduction disappears. In short, this deduction offers welcome savings for those who qualify, but no strong reason to change your plans regarding a purchase as important as a car.

Qualification checklist

So far we’ve been talking about the size of the benefit you can hope to achieve if you qualify. If you’re still with me, it’s time to see all the hoops you need to jump through to qualify for this benefit.

Vehicle requirements

• Right type of vehicle

Despite the name, the “no tax on car loan interest” rule isn’t limited to cars. It can be a car, minivan, van, SUV, pickup truck or motorcycle.

An early version of this legislation would have included ATVs, trailers and campers. These did not make the final cut. Interest paid on loans to buy these items will not be deductible.

It has to be manufactured primarily for use on public streets, roads, and highways. This requirement might rule out a golf cart, even if you use it in a place where they’re allowed on the roads.

• Weight limit

Some websites state erroneously that the vehicle has to weigh less than 14,000 pounds. The actual rule is that the vehicle’s gross vehicle weight rating has to be less than 14,000 pounds. This is the maximum allowable weight of the vehicle when fully loaded. Heavy duty pickups may exceed this limit even if the vehicle alone weighs less than 14,000 pounds.

• New vehicles only

Only vehicles where “original use commences with the taxpayer” qualify. This means used cars don’t qualify, even if you’re the second owner of a nearly new vehicle.

• Personal use

The “no tax on car loan interest” deduction is allowed only when the vehicle is bought for personal use. If you’re buying for business or commercial use, check to see whether a business expense deduction may be allowed for interest on the loan.

• Made in America

No tax on car loan interest applies only to vehicles built in the United States. Specifically, the “final assembly” has to be in the U.S.

This is a tricky requirement. U.S. companies build some of their cars in other countries. American-branded vehicles assembled outside the U.S. don’t qualify. Likewise, many foreign companies build some of their cars in the U.S., and those cars would qualify.

What’s more, you can’t rely on general statements about the make and model. Are Toyota Corollas built in America? Some are, but some are not.

If you’re shopping at the dealership, you should be able to find the final assembly location on the car’s window sticker. When shopping online, the window sticker may not be visible. In that case, look for the vehicle identification number. Copy and paste the VIN into the National Highway Traffic Safety Administration’s VIN decoder. The results page will provide a great deal of information about the car. The location where the car was assembled appears near the bottom of the page.

You’ll have to include the VIN on your tax return when claiming this deduction.

Loan requirements

• Purchase, not lease

The “no tax on car loan interest” deduction applies only when you pay interest on a loan. Lease payments don’t qualify for the deduction.

• 2025 or later

If you meet all the requirements, you can claim the deduction for interest paid on a debt incurred after December 31, 2024, even if you bought the car before the new law was signed on July 4, 2025. Car loans from before 2025 don’t qualify.

• Security requirement

The loan must be secured by a first lien on the vehicle. Unsecured personal loans used to buy cars don’t qualify, nor do loans secured by other assets. Did you put some or all of the purchase price on a charge card? Interest paid on that card won’t qualify.

• Related party exclusion

You can’t claim the deduction if you owe the money to a related party, such as a family member or a business you control.

• Refinancing is allowed

If you refinance a qualifying vehicle loan, interest on the new loan generally remains deductible, but only up to the amount of the original loan balance.

Example: You take out a $40,000 qualifying car loan. Later, you refinance the remaining $30,000 balance. Interest on the $30,000 refinanced amount remains deductible. If you borrowed additional cash during refinancing, interest on that extra amount wouldn’t qualify.

• Lender reporting

Lenders will be required to notify you each year of the amount of interest you paid on your car loan and other information such as the VIN, with a copy to the IRS. Beginning in 2026 this report should be on an official IRS form. Because the IRS needs more time to develop the form, and lenders will need more time to comply with the new requirement, for 2025, lenders will merely have to make available a statement of the total amount of interest for that year. Lenders will have flexibility as to how to make the statement available, so you may see this included in a regular monthly statement or it may be available online.

Reference: Notice 2025-57

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