For the 2025 tax year, eligible U.S. taxpayers can deduct up to $10,000 in interest on auto loans under a temporary provision enacted as part of President Donald Trump’s One Big Beautiful Bill Act.
However, most eligible borrowers’ deductions are much lower, primarily because even a large auto loan won’t accrue nearly $10,000 in interest in a single year. That figure is close to the total interest a borrower typically pays over the life of a 72-month new car loan, according to car shopping and auto data provider Edmunds.
In fact, for most borrowers, the deduction is likely to save hundreds of dollars a year, rather than thousands, according to auto research firm Cox Automotive.
Eligibility rules further limit who can claim the credit, as the credit only applies to newly purchased cars financed on or after December 31, 2024, excludes cars assembled abroad, and is phased out for high-income earners.
Jeremy Robb, chief economist at Cox Automotive, told CNBC Make It: “This tax credit is limited, does not move the market, and is not a tool to substantively address the affordability challenges and high interest rates facing the market.”
People eligible for auto loan interest deduction
The auto loan interest deduction is a 2024 campaign promise of President Trump, and will go into effect on July 4, 2025 as part of the “One Big Beautiful Bill Act.” This deduction itself is temporary and only applies for tax years 2025 to 2028.
This deduction only applies to loans that meet the following requirements, according to the Internal Revenue Service:
Loans must begin after December 31, 2024 and must be secured by the vehicle. Vehicle must be new. Used car loans are not eligible. The vehicle must be for personal use, not business or commercial use. Eligible vehicles include cars, minivans, vans, SUVs, pickup trucks, and motorcycles with a gross vehicle weight of less than 14,000 pounds. Vehicle must have undergone final assembly in the United States. Cox said this represents about 50% of all cars sold in the United States.
The maximum $10,000 deduction is phased out at higher income levels. For single filers, the phaseout begins at $100,000 of modified adjusted gross income and ends at $150,000. For married couples filing jointly, the phaseout starts at $200,000 and ends at $250,000, according to the IRS.
Eligibility is limited by income and vehicle rules, but eligible taxpayers can claim the deduction whether they itemize deductions or take the standard deduction.
Why most buyers don’t approach $10,000
Few qualified buyers will see a tax reduction of nearly $10,000.
A 72-month new car loan with a 9.5% interest rate and 12.5% down payment on a $48,000 car will result in about $3,800 in interest in the first year, according to an analysis by Cox Automotive. Interest costs drop to about $3,200 in the second year and about $2,600 in the third year.
Although the full amount of interest is deductible, it only reduces the portion of your income that is subject to tax, not the tax owed on a dollar-by-dollar basis. As a result, the actual tax savings will be less than the interest paid.
Cox Automotive calculates that, assuming a federal tax rate of about 15% to 20% for new car buyers, the tax savings would be less than $750 in the first year. In the second year, your savings decrease to approximately $640 because interest costs decrease.
Rob says it would take a loan of about $112,000 to generate $10,000 in deductible interest in the first year alone.
How to claim deductions on your tax return
This deduction is claimed on Schedule 1-A, an updated attachment to Form 1040. This attachment is automatically completed by the tax software for most filers.
Taxpayers must include their vehicle identification number (VIN) on their tax return for the year they claim the credit. The VIN is a 17-character number that typically appears on the driver’s side of the dashboard near the windshield or inside the driver’s door frame, as well as on vehicle documents such as the vehicle title and insurance card.
Buyers can determine whether a vehicle was ultimately assembled in the United States using the National Highway Traffic Safety Administration’s VIN decoder, which identifies a vehicle’s assembly plant.
Lenders must provide borrowers with statements showing the total amount of interest paid on eligible auto loans.
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