There’s a brand-new tax deduction 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 eliminated a tax credit for buying electric vehicles.
Here’s what to know about the new 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 excluded. (That means many of the buyers most burdened by high interest—used-vehicle buyers with poor credit—won’t benefit.) 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 (MAGI) of $100,000 or more. The phaseout begins at $200,000 for married couples filing jointly. MAGI is calculated after certain deductions like tax-deductible retirement contributions, and because the phaseout is gradual, taxpayers near the cutoffs might still deduct a portion of their interest paid.
The vehicle must have been assembled in the United States
To qualify, the vehicle’s final assembly must have occurred in the U.S.; you can determine this using the vehicle identification number (VIN). Buying an “American” brand does not guarantee U.S. assembly. Some domestic-branded cars are assembled overseas, while some foreign-branded vehicles are assembled in the U.S. Also, the vehicle must be for personal use, not business.
If you and the vehicle both qualify, you can deduct up to $10,000 in interest paid per year
For this tax season, check your 2025 loan statements to see total interest paid; lenders won’t send a separate tax document. Remember a deduction is not a tax credit: it reduces taxable income, not tax owed dollar for dollar. For example, a $1,000 deductible interest payment is worth about $220 if you’re in the 22% tax bracket.
The deduction is available even if you take the standard deduction
Unlike many deductions (including the mortgage interest deduction), this one can be claimed by taxpayers taking the standard deduction, expanding who might benefit.
The policy is unlikely to be a major boost to domestic manufacturing
Previous administrations used tax credits to push automakers to build electric vehicles in North America. This deduction is limited in scope—it doesn’t apply to leases, offers no benefit for buyers with 0% financing or those who didn’t take loans, and is relatively small—so it’s unlikely to sway automakers’ production decisions. It will, however, provide a modest benefit to some buyers and doesn’t make anyone worse off.