Who Can Actually Claim the New Auto Loan Interest Deduction?
If you’re eyeing a new car and wondering if you’ll qualify for this fresh tax break, you’re not alone. The new rule lets you deduct up to $10,000 in loan interest per year on certain vehicles from 2025 through 2028. But there’s a catch: not every car or buyer is eligible.
First, your vehicle must be a light-duty model—meaning it weighs less than 14,000 pounds. That covers most sedans, SUVs, and pickups, but rules out heavy-duty trucks and commercial rigs. Second, the car needs to be made in the USA. Think of brands with domestic assembly plants—Ford, GM, Tesla, and some Toyota or Honda models built stateside. If you’re unsure, check the window sticker or ask your dealer for the vehicle’s final assembly location.
As for you, the taxpayer, you’ll need to itemize deductions on your federal return to take advantage. If you usually take the standard deduction, crunch the numbers to see if itemizing makes sense with this new perk in the mix.
What Counts as “Made in the USA” for This Deduction?
This question trips up a lot of buyers. The IRS uses the final assembly point to determine if a car is “made in the USA.” It doesn’t matter if some parts come from overseas; what counts is where the car was put together. For example, a Toyota Camry assembled in Kentucky qualifies, but one built in Japan does not.
Automakers are already highlighting their American-made models, so expect more transparency at dealerships. The American Automobile Labeling Act (AALA) label on each new car spells out the percentage of U.S. content and the assembly location—worth a look before you sign anything.
How Much Could This Deduction Actually Save You?
Let’s get into the numbers. If you finance a $40,000 vehicle at 6% interest over five years, you’ll pay around $6,300 in interest the first year. Under the new rule, you could deduct that entire amount—up to the $10,000 cap. If you’re in the 24% tax bracket, that’s a potential savings of $1,512 on your federal taxes for the year.
Of course, as your loan balance drops, so does the interest paid each year. But for buyers with larger loans or higher rates, this deduction could be a game-changer. According to the IRS, the average American car loan is now over $40,000, and interest rates have climbed since 2022. That means more people stand to benefit from this tax break than ever before.
Are There Any Hidden Restrictions or Pitfalls?
There are a few. First, the deduction only applies to new loans taken out on eligible vehicles from 2025 onward. Refinancing an old loan or buying a used car won’t qualify. Also, if you use the vehicle for business, you’ll need to follow different IRS rules—this deduction is aimed at personal-use vehicles.
Another wrinkle: if you trade in your car or pay off the loan early, you can only deduct interest paid during the eligible years. And remember, you can’t double-dip by claiming both this deduction and any business-related vehicle expenses on the same car.
How Does This Stack Up Against Other Car-Related Tax Benefits?
Historically, the IRS hasn’t allowed much in the way of auto loan interest deductions for personal vehicles. This new rule is a big shift, putting car buyers on more equal footing with homeowners who deduct mortgage interest. It’s also separate from existing EV tax credits or state-level incentives, so you could potentially stack savings if you buy an American-made electric vehicle.
Financial planners suggest reviewing your full tax picture before making a purchase. If you’re already itemizing for mortgage interest or medical expenses, this deduction could tip the scales even further in your favor.
What Should You Do Before Taking Out a Loan?
Before you rush to the dealership, take a breath. Start by checking your credit score—better rates mean less interest, which is good for your wallet even if you’re deducting it. Next, confirm the vehicle’s assembly location and ask the dealer for documentation.
It’s also smart to run the numbers with a tax professional. They can help you estimate your potential savings and decide if itemizing is the right move. And don’t forget to keep detailed records of your loan payments and interest statements; the IRS may ask for proof down the line.
The big takeaway? This new auto loan interest deduction isn’t about perfection—it’s about smarter adjustments. Start with one change this week, and you’ll likely spot the difference by month’s end.
