How to deduct new car loan interest under the OBBB

If you financed a vehicle recently, you may be eligible for a new tax break when you file your return for tax year 2025. Some car loan interest is now tax-deductible in certain situations under the One Big Beautiful Bill Act (OBBB), a major piece of tax legislation that President Trump signed on July 4, 2025.

Wondering whether your car loan could lower your tax bill? Read on to learn about the new tax deduction for car loan interest, who’s eligible, and a few rules you should know.

The One Big Beautiful Bill Act allows you to deduct up to $10,000 of car loan interest from your federal taxes in some circumstances. Also called the “no taxes on car loan interest,” the temporary deduction applies to tax years 2025 through 2028. It’s an above-the-line deduction (similar to the student loan interest deduction), meaning you can claim it even if you take the standard deduction vs. itemizing.

But not everyone with a car payment will qualify. You can only take advantage of the new deduction if the following applies:

You took out the loan after Dec. 31, 2024. (Leases won’t qualify.)

The vehicle is for personal use.

The vehicle is a car, minivan, van, SUV, truck, or motorcycle that weighs less than 14,000 pounds.

You purchased the vehicle new.

The vehicle’s location of final assembly is in the U.S. (More on that shortly.)

To qualify for the full car loan interest deduction, your taxable income can’t exceed $100,000 if you’re single or $200,000 if you’re married filing a joint return. The deduction will phase out if your income exceeds these thresholds. You won’t be able to deduct car loan interest at all if your income is above $150,000 (single filers) or $250,000 (joint filers).

To qualify for the deduction, your vehicle doesn’t need to be an American car brand, and it doesn’t need to be “made in America,” but its final location of assembly must be in the U.S. The distinction can be a bit nuanced, but the easiest way to see if your vehicle qualifies is to check the vehicle identification number (VIN).

You can use the National Highway Traffic Safety Administration (NHTSA) VIN Decoder to check for its plant of manufacture. If you’re shopping for a new vehicle, the dealership should have plant location information on the label attached to each vehicle.

Below, you’ll find the final assembly location for the 10 most popular vehicles in the U.S. (based on 2024 sales):

Suppose you purchased a new vehicle that meets the criteria for the car loan interest deduction in June 2025. Your total loan amount was $50,000. Your loan has a 60-month term and a 10% interest rate. Your first payment came due in July 2025, so you made six months’ worth of payments for the tax year.

Your monthly payments are roughly $1,062. Overall, your payments totaled about $6,374 in 2025, of which $3,956 was principal, and the remaining $2,418 was interest. Your maximum deduction is $2,418.

Let’s say your filing status is single and your taxable income for 2025 is $80,000. You’d be able to deduct the entire $2,418.

Because it’s a tax deduction vs. a tax credit, it won’t reduce your tax bill dollar for dollar by $2,418. Instead, it shaves $2,418 off your taxable income of $80,000, bringing it to $77,582. Since your marginal tax rate is 22%, you’d reduce your tax bill by about $532, or 22% of the $2,418 of interest you paid.

Here are the basic steps you’ll need to take to deduct car loan interest. Note that the top tax software will walk you through this process:

To deduct the vehicle on your tax return that’s due April 15, 2026, you’ll need to have purchased and financed the vehicle in 2025. Used vehicles and leased vehicles won’t qualify. Use the NHTSA’s VIN Decoder to confirm that your vehicle’s final location of assembly was in the U.S.

You can only deduct the amount you paid in car loan interest, not your total car loan payment. It’s possible to calculate this number using an amortizing loan calculator by tallying the amount of each monthly payment that went toward interest.

But a much easier approach is to contact your lender. The IRS will require lenders to provide borrowers who are eligible for the car loan interest deduction with a statement showing interest paid in future years. But you may have to reach out to request this information for 2025.

You’ll need to file Schedule 1-A, a new IRS form that will be used to report above-the-line deductions. You’ll also use this form if you’re deducting or if you qualify for the three other new above-the-line deductions created by the OBBB: the no taxes on tips deduction, the no taxes on overtime deduction, and the enhanced deduction for seniors 65 and older. In addition to the amount of interest paid, you’ll need to include your car’s VIN. You’ll then submit Schedule 1-A to the IRS with Form 1040 when you file your return.

All told, the car loan interest deduction probably won’t make a huge difference in your overall tax situation. But if you think you qualify, it’s worth gathering a couple of details so you can lower your tax bill or land a bigger tax refund.

Is car loan interest tax-deductible?

Car loan interest may be tax-deductible if you purchased a new vehicle after Dec. 31, 2024, that was assembled in the U.S. You can only deduct up to $10,000 worth of interest. The deduction phases out if you earn more than $100,000 as a single filer or $200,000 if you’re married filing jointly.

How can I deduct car loan interest from my taxes?

To deduct car loan interest from your taxes, you’ll need to provide the amount of interest paid and your VIN on a new form called Schedule 1-A. You’ll include this form when you file Form 1040.

Do electric vehicles qualify for the car loan interest deduction?

Yes, if you purchased your electric vehicle new after Dec. 31, 2024, and its final assembly location was in the U.S., you’ll probably qualify for the car loan interest deduction. Assuming your vehicle qualifies, you can claim both the car loan interest deduction and the clean energy credits that expired Sept. 30, 2025, on your tax return.

Is business car loan interest tax-deductible?

Yes, you can deduct car loan interest on a vehicle used for business if you’re self-employed or own a business. This deduction existed prior to the passage of the OBBB.

If you use the standard mileage rate (70 cents per mile in 2025), you can deduct vehicle expenses based on the miles you drove for business, plus the interest portion of the loan relative to the percentage of time you use it for business. The actual expenses method requires a bit more recordkeeping but bases your deduction on your total costs associated with the vehicle, including interest, depreciation, maintenance, and gas.