If you bought a new car last year, you might get a fresh tax break this season. The One Big Beautiful Bill Act introduced a deduction for interest paid on auto loans for new vehicles assembled in the U.S., shaking up how car buyers handle their taxes.
A New Deduction for New Car Buyers
Starting with 2025 tax returns filed in 2026, taxpayers can deduct interest paid on auto loans for new cars purchased after December 31, 2024. But it’s not just any car that qualifies. The vehicle must be brand new and have its final assembly in the United States. Used cars and leases don’t make the cut.
That means this deduction doesn’t help the buyers usually feeling the pinch from high interest on used car loans—often those with lower credit scores who turn to the used market. Instead, it targets consumers investing in new vehicles, with a focus on American manufacturing.
Income Limits Narrow Eligibility
Not everyone will get to claim this deduction. Single filers with a modified adjusted gross income (MAGI) above $100,000 won’t qualify, and the cutoff for married couples filing jointly starts at $200,000. The deduction phases out gradually above these thresholds, so some higher earners near the limit might still deduct a portion of their interest.
MAGI is calculated after certain deductions, like retirement contributions. That means even some six-figure earners could benefit if their taxable income is reduced by other factors.
How Much Can You Deduct?
The deduction caps at $10,000 in interest paid per year on qualifying auto loans.
Most people don’t pay that much interest annually, so their tax break will be smaller. Experts estimate typical savings to range between $300 and $900, depending on the interest paid and the taxpayer’s income tax rate.
It’s important to remember that a deduction reduces taxable income rather than directly cutting your tax bill dollar for dollar. For example, if you paid $1,000 in interest, the deduction lowers your taxable income by that amount, which might save you a few hundred dollars depending on your tax bracket.
Which Vehicles Qualify?
The car has to be assembled in the U.S., and buyers should check their vehicle identification number (VIN) to confirm. Assembly location can be tricky since some American brands assemble cars overseas, while some foreign brands put together vehicles here.
For instance, a Ford or Chevy might be assembled abroad, while a Japanese or German brand could qualify if their final assembly was stateside.
The vehicle must be for personal use, not business. It can be a car, minivan, SUV, pickup, or motorcycle, as long as it weighs under 14,000 pounds. Heavy-duty trucks don’t qualify.
This new tax break comes alongside the removal of the federal electric vehicle tax credit, making it a notable shift in incentives for car buyers.
The Bigger Picture
The One Big Beautiful Bill Act made many tax cuts permanent and added new deductions and credits for 2025 returns. Besides the car loan interest deduction, it raised the state and local tax (SALT) deduction cap from $10,000 to $40,000, increased the Child Tax Credit to $2,200 per child, and expanded the Earned Income Tax Credit.
For car buyers, this new deduction might nudge more shoppers toward American-assembled vehicles. Patrick Masterson from Cars.com highlighted that affordability remains key but tax incentives and tariff news are motivating buyers to dig into where their cars are made.
Still, the deduction benefits only a segment of taxpayers. Many used-car buyers who carry heavy loan interest won’t see relief. But for those in the market for a new ride and who meet the income and assembly requirements, That could mean meaningful savings.
Buyers planning to claim the deduction should gather their 2025 loan statements showing interest paid, as lenders won’t send a separate tax form for this. Checking your vehicle’s VIN and your income level carefully will determine eligibility. This tax season, the rules have shifted, and new car buyers could find relief where they least expected it.
