Source: IRS and practitioner commentary
The U.S. Department of the Treasury and the Internal Revenue Service (Internal Revenue Service) have issued guidance on a new deduction commonly referred to as “No Tax on Car Loan Interest,” enacted as part of the One, Big, Beautiful Bill.
This summary is intended to explain the provision in an educational, non-promotional manner.
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1. Overview of the New Deduction
• Effective period: Tax years 2025 through 2028
• Eligible expense: Interest paid on a loan used to purchase a qualified vehicle for personal use
• Maximum deduction: Up to $10,000 per year
• Income phaseout:
o Begins at $100,000 of modified adjusted gross income (MAGI)
o $200,000 for married taxpayers filing jointly
• Leases excluded: Interest embedded in lease payments does not qualify
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2. What Counts as Qualified Interest
To be eligible, the interest must be paid on a loan that meets all of the following conditions:
• The loan originated after December 31, 2024
• The loan proceeds were used to purchase a vehicle originally used by the taxpayer
• The loan is secured by a lien on the vehicle
• The vehicle is used for personal (nonbusiness) purposes
Refinanced loans:
If a qualifying vehicle loan is later refinanced, interest paid on the refinanced balance is generally eligible, provided the other requirements continue to be met.
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3. What Is a Qualified Vehicle
A qualified vehicle includes:
• Passenger cars
• Minivans and vans
• SUVs
• Pickup trucks
• Motorcycles
Additional requirements:
• Gross Vehicle Weight Rating (GVWR) under 14,000 pounds
• Final assembly in the United States
How to verify final assembly:
• Vehicle label at the dealership
• Vehicle Identification Number (VIN)
• National Highway Traffic Safety Administration (NHTSA) VIN Decoder
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4. Who May Claim the Deduction
• Available to both itemizing and non-itemizing taxpayers
• The VIN must be reported on the tax return for each year the deduction is claimed
• The deduction applies only to individual taxpayers and personal-use vehicles
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5. Reporting and Information Returns
• Lenders (or other recipients of qualified interest) are required to:
o File information returns with the IRS
o Provide annual statements to taxpayers showing the total interest received during the tax year
Taxpayers should retain loan documents and lender statements to substantiate the deduction.
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Practitioner Note
This summary reflects current IRS guidance and statutory language as of the date of publication. Future regulations or technical corrections may affect eligibility, reporting, or computation.
Posted by Zaher Fallahi, CPA, MS, MBA, Esq
Practice focus: federal tax compliance and tax controversy nationwide
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Disclaimer
This material is provided for general informational and educational purposes only and does not constitute legal or tax advice. No attorney–client or CPA–client relationship is created by reading or sharing this content. Tax consequences depend on individual facts and circumstances, and readers should consult their own tax advisor regarding application of the law to their specific situation.