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Bought A New Car Last Year? You Could Qualify For This Tax Break

A new federal deduction could reduce your tax bill.

By Adam Palasciano , Edited by Kristy DeSmit

Updated March 15, 2026

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If you financed a new car in 2025, your loan could do more than get you from point A to point B. A provision in the One Big Beautiful Bill Act (OBBBA) introduces a temporary tax deduction for certain auto loan interest payments.

For eligible buyers, this change could help you keep more of what you earn when you file your return. But the rules are specific — and not every borrower qualifies.

Here's how the new deduction works and whether it applies to you.

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'No tax on car loan interest' explained

The OBBBA created a new deduction for interest paid on qualifying car loans. Effective for tax years 2025 through 2028, individuals may deduct up to $10,000 per year in interest paid on a loan used to purchase a qualified vehicle for personal use. Lease payments do not qualify for this break.

The IRS notes that the vehicle must meet specific eligibility criteria, and the deduction is temporary under current law.

This means if you financed a new vehicle and paid interest in 2025, you may be able to subtract that amount — up to the $10,000 cap — from your taxable income.

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Who qualifies for the car loan interest deduction?

Not every car buyer will be eligible. The deduction begins phasing out for taxpayers with modified adjusted gross income above $100,000, or $200,000 for married couples filing jointly.

To qualify, the loan must have originated after December 31, 2024, used to purchase a new vehicle for personal use, and be secured by a lien on that vehicle. Used vehicles, leases, and business-use vehicles do not qualify.

If you refinance a qualifying auto loan, interest on the refinanced balance may still be eligible, according to IRS guidance. It's estimated that roughly 4 million of the nearly 13.4 million new cars sold in the U.S. last year would meet the eligibility criteria. That means millions of taxpayers could potentially benefit — but many others who bought used cars or leased vehicles will not qualify.

How to claim the new auto loan interest deduction

To claim the deduction, you will need documentation showing how much interest you paid during the tax year. Tax professionals advise gathering your 2025 auto loan statements before filing. You will also need to complete the appropriate tax form — such as Schedule 1-A — including information about your income, the loan, and the vehicle identification number.

Submitting accurate details with your return is critical, as errors could delay processing or reduce the deduction. If you use tax preparation software, the program should prompt you for qualifying loan information. Working with a tax professional can help ensure you claim the full amount you are entitled to receive.

How much the deduction could save you this tax season

The potential savings depend on your income level, tax bracket, and the amount of interest you paid. Because the deduction reduces taxable income — not your tax bill dollar for dollar — the benefit varies by filer.

For someone in a high tax bracket who paid several thousand dollars in interest last year, the savings could be more modest compared with others in lower tax brackets who may be able to claim the $10,000 maximum benefit.

Why this deduction matters for car buyers

Auto loan rates have risen in recent years, increasing the total cost of financing a vehicle. Allowing borrowers to deduct up to $10,000 in interest can help offset part of that burden.

The temporary nature of the provision also creates a limited window for taxpayers to benefit. For buyers who were already planning to finance a new vehicle, the deduction could make ownership slightly more affordable.

At the same time, the tax break should not be the sole reason to take on debt. The overall cost of the vehicle, interest rate, and long-term budget impact still matter more than any deduction.

Bottom line

If you purchased and financed a new car in 2025, the OBBBA may allow you to deduct up to $10,000 in qualifying interest annually through 2028. Income limits, vehicle requirements, and documentation rules all apply, so careful review is essential.

With millions of new car buyers potentially eligible, this deduction could reduce your taxable income and lower your financial stress — but only if you meet the criteria and claim it correctly. Be prepared to check your loan documents to see if this tax break applies to you.

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Author Details

Adam Palasciano

With six years of experience covering personal finance, Adam Palasciano specializes in retirement planning. He helps readers make smarter investment decisions as retirement approaches and find ways to make their savings last longer once they get there. He also breaks down complex topics like Social Security benefits so readers can better understand how to maximize the income they’ll rely on later in life.