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President Donald Trump’s mega tax-and-spending cuts bill, signed into law last week, contains plenty of new tax provisions, the contours of which Americans are still digesting.
One of them is the new temporary income tax deduction for interest paid on loans financing the purchase of qualified passenger vehicles. The provision is only in effect for purchases made in 2025, 2026, 2027 and 2028.
The provision limits what kinds of vehicles and loans qualify. And it caps how much loan interest may be written off in a given year and by whom.
Here’s what you need to know.
The deduction applies to a wide range of vehicles, but not all.
Personal use only: To qualify, the vehicle you buy must be for your personal (i.e., non-business, non-commercial) use. It can include cars, motorcycles, minivans, vans, sport utility vehicles and pickup trucks, said David Mellem, an enrolled agent who runs Ashwaubenon Tax Professionals in Wisconsin.
New vehicles only: The deduction only applies to new vehicles you buy, not used ones. The language in the law refers to vehicles whose “original use … commences with the taxpayer.” That said, it’s unclear if there might be an exception made if you buy a showroom model that has been used by employees, Mellem said.
“Final assembly” in the US: The vehicle you buy will only qualify for the loan interest deduction if its “final assembly” occurred in the United States. It’s unclear how a car buyer will know that. But it’s likely that dealers will advertise those cars that qualify for the deduction — and perhaps may need to give you a certificate. Or, as it did with the now-expiring clean vehicle tax credits, the IRS may compile a list that you can check against, Mellem said.
The law also requires that the entities making vehicle loans provide purchasers with a tax reporting form. That form will include details about the loan as well as the purchased vehicle that secures the loan, including the vehicle identification number.
Unicycle enthusiasts appear to be out of luck, because the law specifies the vehicle must have at least two wheels.
So, too, are drivers of golf carts, because another requirement to take the deduction is that the vehicle must be manufactured for use on public streets, roads and highways, Mellem noted.
No.
If you get a loan from family or friends, you will not be able to deduct the interest you pay them, Mellem said. The same goes for loans taken out for vehicles you intend to sell for parts, or any lease financing.
You may be allowed to deduct the interest on a refinanced loan on a personal vehicle, but only on the amount you still owe at the time of refinancing, and only if the bank still has the first lien on your car, he added.
Who is eligible to take the tax break and how much interest may be deducted?
The new deduction will be available to all eligible vehicle buyers, regardless of whether they itemize their deductions or take the standard deduction.
But you may not deduct more than $10,000 in interest a year.
And you will be further limited in the size of your deduction if your modified adjusted gross income exceeds $100,000 ($200,000 for married couples filing jointly). Your deduction will be reduced by $200 for every $1,000 your income exceeds those MAGI thresholds.
Translation: You will not be able to deduct any loan interest at all if your MAGI is more than $149,000 ($249,000 for joint filers), Mellem said.
Another group that may not benefit from the deduction is lower-income filers who might not have enough income tax liability to take the deduction against.
A deduction reduces your tax bill by an amount equal to your top tax rate multiplied by the amount you’re deducting. So if your top tax rate is 12%, you will reduce your federal income tax liability by $12 for every $100 you deduct. If you’re in the 22% bracket, you cut your tax bill by $22 for every $100 you write off.
Based on the income limitations for the vehicle interest deduction, Mellem expects that few people with top tax rates above the 22% mark will get to take the deduction. And the maximum reduction in your tax bill — assuming you write off the full $10,000 in interest at a top rate of 22% — would be $2,200.
But it’s likely that most car buyers won’t come anywhere near that maximum.
In May of this year, the average total interest paid over the life of a new-vehicle loan came to $9,851, according to data from Edmunds.com. The average term of those loans as of the first quarter this year was 69.5 months.
The value of the deduction to those eligible to take it might also be weighed against any potential price increases in vehicles due to the onset of tariffs. While such increases largely haven’t hit yet, if they do materialize, the deduction may not be enough to compensate.
The Institute on Taxation and Economic Policy, a left-leaning research group, estimates that if a vehicle price rises by 5%, “the deduction will cancel out roughly a quarter or less of the cost of the tariff for single filers earning $63,475 or less and joint filers earning $126,950 or less. At all eligible income levels, the deduction would fail to offset even a 3% price increase due to tariffs, which is on the low end of economists’ expectations.”
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