Can I deduct car loan interest in 2025?
Interest on a loan to buy a qualifying personal-use vehicle can now be deducted up to an annual cap, whether you itemize or take the standard deduction. The vehicle must have final assembly in the United States, and the loan must be secured by the car. The deduction phases down above a modified adjusted gross income threshold, and each car's vehicle identification number must be reported on the return.
For tax year 2025
- $10,000 (car loan interest deduction cap, 2025)
- $100,000 ($200,000 married filing jointly) (car loan interest MAGI phase-down, 2025)
Key points
- Interest on a loan used to buy a new, personal-use vehicle with final assembly in the United States is deductible up to an annual cap for tax years 2025 through 2028.
- The loan must be secured by a first lien on the vehicle; a general personal loan or home-equity draw used to buy a car does not qualify.
- Leases produce no deductible loan interest because there is no purchase loan, and business vehicles follow separate rules on the business return.
- The vehicle identification number of each financed vehicle must be reported on the return, and a claim without it is incomplete on its face.
- The deduction is available whether the taxpayer itemizes or takes the standard deduction, but it phases down above a modified adjusted gross income threshold.
What changed for personal car loan interest?
For decades, interest on a personal car loan was nondeductible personal interest with no offset. A new provision in section 163(h) of the Internal Revenue Code, in effect for tax years 2025 through 2028, lets you deduct interest paid on a qualifying vehicle loan up to an annual cap. It applies to personal-use vehicles; a vehicle used in a business follows the long-standing rules for business interest and depreciation on the business return.
You claim it on Schedule 1-A, whose total flows to Form 1040, line 13b, and it is available whether you itemize or take the standard deduction. That is a meaningful change from how mortgage interest works, where the deduction is lost unless you itemize.
Which vehicles and loans qualify?
The loan must be taken out after December 31, 2024, must be used to purchase the vehicle, and must be secured by a first lien on that vehicle. A general personal loan, a credit card, or a home-equity draw used to buy a car does not qualify, and neither does a loan from a related person or a lease. The vehicle must be new, meaning its original use begins with you; it must be a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle built for public roads; and its final assembly must occur in the United States. Refinancing a qualifying loan can preserve the deduction up to the remaining balance of the original loan, so the original loan's character matters.
The most easily missed requirement is documentary: the vehicle identification number, or VIN, of each vehicle must be reported on the return. The VIN is how the domestic-assembly and eligibility conditions are checked, and a return that claims the deduction without it is incomplete on its face. Pull the VIN from the purchase paperwork and record it precisely; if you financed more than one qualifying vehicle, each VIN goes on the return. Lenders that receive interest on a qualifying loan must report it and furnish a statement showing the interest paid, so request it if it does not arrive.
What are the limits of the car loan interest deduction?
The deduction is capped at an annual maximum, so interest above the ceiling is not deductible. It also phases down once modified adjusted gross income rises past a threshold and shrinks as income climbs until it disappears for high earners. Because the phase-down runs on household income, a high-earning taxpayer may find little or none of the interest deductible even on a large loan.
It does not apply to used vehicles, including those with a salvage title, to fleet purchases, to vehicles bought for resale or business use, or to a loan not secured by the car itself. The interest is deductible only for the years the provision is in force, and the assembly-location test is checked against the specific vehicle rather than the brand, since one model can be assembled in several countries.
What records should you keep?
Keep loan statements showing the interest paid, the purchase documents establishing the vehicle and its assembly location, and the VIN. The window sticker or the manufacturer's build information identifies the final assembly plant. Ask the lender for a year-end interest statement if one is not provided.
The eligibility rules, the cap, and the phase-down thresholds are still settling in the first year, so confirm each with a CPA before relying on the deduction.
Related strategies
People also ask
- What is Schedule 1-A and which deductions go on it?
- How do I deduct a vehicle used for business?
- Should I take the standard deduction or itemize?
- I'm a W-2 physician with no business — what can I actually do about taxes?
Sources
Related guides: high income professionals
Mena Hemaia, CPA, CIA
Chief Executive Officer, Accountack — West Palm Beach, Florida
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