Rising vehicle prices and higher interest rates have made financing a car more expensive than ever. Fortunately, a major change in federal tax law—passed as part of the One Big Beautiful Bill Act (OBBBA)—is providing much-needed relief.
For the first time in decades, certain taxpayers can now deduct auto loan interest from their federal taxes. If you bought a new car in 2025 or are planning a purchase before 2028, here is everything you need to know to claim this “above-the-line” deduction.
How the Auto Loan Interest Deduction Works
Under the new law, the auto loan interest deduction allows eligible taxpayers to reduce their taxable income by the amount of interest paid on a qualifying vehicle loan.
Key Fast Facts:
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Annual Limit: Deduct up to $10,000 per year in interest.
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Eligibility Period: Applies to interest paid in tax years 2025 through 2028.
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No Itemizing Required: This is an “above-the-line” deduction (claimed on the new Schedule 1-A), meaning you can benefit even if you take the standard deduction.
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Loan Timing: The loan must have originated after December 31, 2024.
Do You Qualify? Income Limits and Requirements
While the savings are significant, the IRS has strict “Made in America” and income-based requirements.
1. The “Final Assembly in the U.S.” Rule
To qualify, the vehicle must have undergone final assembly in the United States.
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How to check: Look at the vehicle’s window sticker (Monroney label) or use the NHTSA VIN Decoder tool.
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Eligible Vehicles: New cars, SUVs, minivans, pickup trucks, and motorcycles weighing less than 14,000 lbs.
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Exclusions: Used cars, leases, and vehicles assembled outside the U.S. do not qualify.
2. Income Phase-Outs (MAGI)
The deduction is designed for middle-income households. The benefit begins to phase out if your Modified Adjusted Gross Income (MAGI) exceeds:
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Single Filers: $100,000 (Fully phases out at $150,000)
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Married Filing Jointly: $200,000 (Fully phases out at $250,000)
Pro Tip: For every $1,000 you earn over the threshold, your maximum deduction is reduced by approximately $200.
The EV Trade-Off: What Electric Vehicle Buyers Need to Know
If you are considering an Electric Vehicle (EV), timing is critical. The same legislation that created the interest deduction also eliminated the Federal EV Tax Credit (previously up to $7,500) effective October 1, 2025.
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Purchased before Sept 30, 2025: You may be able to “double dip”—claiming both the EV Tax Credit and the interest deduction.
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Purchased after Oct 1, 2025: You can no longer claim the $7,500 credit, but you can still deduct your loan interest if the EV was assembled in the U.S.
How to Claim: Introducing IRS Schedule 1-A
To claim this deduction on your 2025 tax return (filed in 2026), you will need to file a new form: Schedule 1-A (Form 1040).
Your Filing Checklist:
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Get your VIN: You must include the vehicle’s Identification Number on your tax return.
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Gather Interest Statements: Your lender should provide a statement (often on your December monthly bill) showing the total interest paid for the year.
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Confirm Personal Use: The deduction only applies to vehicles used for personal, not business, purposes.
The Bottom Line
The 2025 auto loan interest deduction is a powerful tool to offset the cost of high interest rates, but it requires careful record-keeping and a “Made in USA” purchase. Before heading to the dealership, verify the assembly location and ensure your loan originates within the qualifying window.
