Shift Gears in Tax Season: What the Car Loan Deduction Means for You

Who doesn't want to save taxes come tax season? Well, none of us really.

Ok, got your attention? In a nutshell, there are savings to be had for US taxpayers in the way of deductions on car loan expenses, including the interest we pay.

Our article breaks down in some detail all the nitty-gritty of what the car loan deduction means for you.

What is the Car Loan Tax Deduction?

The deduction of car loan expenses for tax purposes in the U.S., including interest deductions, is dependent on criteria such as the purpose of the vehicle's use.

Typically, personal use car loan interest and payments have not been tax-deductible, while business-related vehicle expenses may be deducted by self-employed individuals or business owners by filing a Schedule C or Schedule F.

There are now further savings thanks to Donald Trump. Trump has sought to strengthen America's economy by encouraging the purchase of locally manufactured products, including our personal-use vehicles.

His "One Big Beautiful Bill" Act of 2025, which was signed into law in July 2025, has changed things up for personal car buyers.

Buying a new vehicle made in the USA now comes with rewards, whereas buying an imported car model will cost more, with new, increased tariffs being applied. Additionally, buyers of fully imported vehicles will not be eligible for the new tax deduction.

The new car loan tax deduction allows individuals to deduct interest paid on a vehicle loan, subject to specified criteria.

Who can claim this new car loan tax deduction?

The new bill provides numerous new tax provisions, including a new temporary income tax deduction on the interest paid on qualifying vehicle financing loans.

Ok, so there are provisions in place, so don't go thinking that it's a free-for-all. There are limitations on the kind of vehicles and which loans qualify for tax deductions, plus there is a limit on the value of how much of the loan interest may be written off in the given tax year, and by whom.

Let's provide some clarity on these provisions:

• This newly introduced car loan tax deduction provision affects only vehicle purchases made from the beginning of 2025 to the end of 2028
• This only applies to personal use vehicles, so no fleet owners or commercial vehicles qualify, nor is there any lease benefit
• The tax deduction will only apply to the purchase of new passenger cars, motorcycles, sport utility vehicles, minivans, vans, and pickup trucks with a maximum weight of 14,000 pounds
• To qualify for the loan interest deduction, your chosen vehicle must be made with its "final assembly" in the United States

Further important facts to note are that your vehicle purchase lender is legally obligated to provide you and the IRS with the correct tax reporting form. This form offers details of the loan, plus details of the purchased vehicle, including the VIN that secures the car loan.

Of course, loans must be from legitimate lenders that include all established financial institutions like the major banks, credit unions, reputable online lenders, and marketplaces. These financial entities are regulated and provide transparent financing options for tax purposes.

This means that no loans from granny or your neighbor are going to get you a tax deduction.

How much can I save with the car loan tax deduction?

For those vehicle buyers who are buying for personal use, annual deductions of up to $10,000 of the loan interest are on the cards.

Remember that these vehicle purchases must be made in the 2025, 2026, 2027, and 2028 tax years.

The exact savings amount, however, depends on your personal tax rates and your loan interest rates. Sorry to say, but buyers need to keep in mind that the principal portion of any car loan payment is never deductible and remains as the repayment of the debt.

A potential interest tax deduction of a maximum $10,000 for the first year of ownership is possible on a new vehicle that meets all the above shared qualifying criteria and is priced up to a maximum of $112,000. 

Owners should also know that with the car loan deduction, any personal vehicle loan tax deduction will be diminished for taxpayers with a modified adjusted gross income over the $100,000 threshold.

The new Act also provides for the reduction of the possible deduction amount by $200 for every $1,000 of income received over this income threshold.

The car loan deduction, however, is not available for those single tax filers fortunate enough to be earning over $150,000 per annum and married couples with a combined income that exceeds $250,000.

How do I claim the Car Loan Interest Tax Deduction?

As we've already learned, this car loan interest tax deduction is only applicable for the purchase of any new eligible US assembled vehicles for the 2025 to 2028 tax years.

New vehicle buyers normally use Form 1040 or Form 1040-SR when filing federal income taxes with the Internal Revenue Service (IRS) and with the state or local tax collection agency to claim their car loan interest tax deduction.

Some of the provisions below should be noted by taxpayers:

• The deduction phases out for taxpayers with a modified adjusted gross income of over $100,000 or $200,000 for joint tax filers
• The interest on a new personal car purchase finance loan for tax deduction is restricted to car loan agreements originating after December 31, 2024
• If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction.

Owners are advised to consult with their tax, legal, or accounting professional when seeking any further detailed information.

Are any Subaru models eligible for the car loan deduction?

Yes! Subaru vehicles manufactured in the United States at Subaru's Lafayette, Indiana plant that are eligible for the car loan tax deduction include the Outback, Legacy, Ascent models, and select trim levels of the Crosstrek and Impreza range.

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