The latest tax season brings a new opportunity for certain car buyers to save money. Taxpayers who purchased a new vehicle in 2025 may be eligible to deduct interest paid on their auto loans, thanks to a provision in recent legislation.
Vehicles fill the parking lot at a Honda dealership in San Marcos, Texas. About 60% of the Honda vehicles sold in the U.S. last year were assembled in the United States, according to Honda, which means they could be eligible for a new tax provision allowing buyers to deduct the interest paid on their auto loans.
Brandon Bell/Getty Images
This deduction is part of the One Big Beautiful Bill Act, which also exempts certain workers from paying taxes on tips and overtime. However, it removes a previous tax credit for electric vehicle purchases. For more information, you can read about the taxes on tips and the EV tax credit elimination.
Here is a breakdown of what car buyers need to know about this deduction.
The deduction applies to new cars purchased after Dec. 31, 2024
Those who took out car loans before this date, or purchased used vehicles, will not benefit. This means individuals typically burdened by high-interest auto loans—such as used car buyers with poor credit—are excluded. However, if you bought a new car in 2025, you’re in luck.
The highest-income households will not qualify
The deduction phases out for single filers with a modified adjusted gross income (MAGI) of $100,000 or more, and for joint filers at $200,000. However, deductions from gross income, like retirement contributions, can alter MAGI, potentially allowing those near the threshold to benefit partially.
The vehicle must have been assembled in the United States
Eligibility requires the vehicle’s final assembly to occur in the U.S., which can be verified using the vehicle identification number (VIN decoder). Mark Gallegos, a tax partner at Porte Brown Wealth Management, emphasizes the importance of checking the VIN to confirm assembly location, as not all “American” brands are U.S.-assembled.
The vehicle must also be for personal use, not business purposes.
If you and the vehicle both qualify, you can deduct up to $10,000 in interest paid per year
Review your auto loan paperwork to determine total interest paid in 2025, as lenders won’t provide separate tax documents. Gallegos also notes that deductions reduce taxable income, differing from tax credits that lower tax liabilities directly. For instance, a $1,000 interest deduction in the 22% tax bracket equates to $220 saved.
The deduction is available even if you are taking the standard deduction
This feature distinguishes it from most deductions, expanding potential beneficiaries, according to Gallegos.
The policy is not likely to be a major boost to domestic manufacturing
The previous administration’s tax policies incentivized domestic manufacturing, especially for electric vehicles, with tax credits. The current administration has eliminated these credits but imposes high tariffs on imported vehicles and parts, potentially influencing production shifts to the U.S.
However, Ivan Drury, head of insights at Edmunds, believes the new deduction’s impact on domestic manufacturing will be minimal, as it’s not substantial enough to influence purchasing or manufacturing decisions. While beneficial to some buyers, it won’t drive automakers to relocate production solely for this tax incentive.
Original Story at www.npr.org