Congress quietly added a new deduction as part of the One Big Beautiful Bill Act, passed on July 4, 2025: a deduction for interest paid on certain new car loans.

On the surface, that sounds simple. In reality, it’s a tightly controlled incentive with income limits, phaseouts, and sourcing rules that will knock a lot of people out without them realizing it.

I’m writing this on December 12, 2025, which also matters. There are a lot of car salespeople pushing the deduction as a benefit of buying a new car right now.

Let’s walk through what the deduction actually is, who qualifies, and—just as important—when you should not let it influence your behavior.

What Is the New Car Loan Interest Deduction?

This new provision allows taxpayers to deduct interest paid on a qualified auto loan, provided the vehicle and the taxpayer meet a specific set of rules.

A few high-level points up front:

• This is a deduction, not a credit

• It applies only to interest, not principal

• It is claimed on the new Schedule 1-A of the Form 1040

• You do not need to itemize deductions to claim it

Because it reduces income rather than tax directly, the value of the deduction depends heavily on your tax bracket and whether you’re subject to the income phaseout.

Where the Deduction Appears on Your Tax Return

The deduction is taken on Schedule 1-A, which is the IRS has drafted to calculate the new senior tax deduction, no tax on tips, no tax on overtime, and no tax on new car loan interest that were created by the OB3 bill.

That placement matters for two reasons:

1. It means the deduction is available even if you take the standard deduction

2. It makes income-based phaseouts easier to enforce

In practical terms, if your tax software (or your tax preparer) doesn’t explicitly ask about this deduction, it’s easy to miss.

Qualification Rules: The Gates You Have to Get Through

This deduction has three main gatekeepers. Miss any one of them and the deduction disappears.

1. The Vehicle Must Be New

• Used vehicles do not qualify

• Refinanced loans on older vehicles do not qualify

• The purchase must meet the bill’s “new vehicle” definition

This deduction is clearly designed to incentivize new car sales, not to reward refinancing or used-car purchases.

2. Final Assembly Must Take Place in the United States

This is where a lot of people will make incorrect assumptions.

Brand name does not matter.
Final assembly location does.

Some vehicles sold under foreign brands qualify. Some vehicles sold under American brands do not.

To check this, you can use the official NHTSA VIN Decoder, which allows you to enter:

• The vehicle identification number (VIN)

• The model year

It will tell you where final assembly took place.

VIN Decoder: https://vpic.nhtsa.dot.gov/decoder/

If final assembly was not in the U.S., the deduction is not available, full stop.

3. The Loan Must Be a Qualified Auto Loan

The deduction applies to interest on a qualified purchase loan tied to the vehicle.

As of this writing, we expect Treasury and IRS guidance to further clarify edge cases such as:

• Refinancing shortly after purchase

• Dealer-paid interest buy-downs

• Related-party financing

Until that guidance is finalized, conservative treatment is warranted.

Modified Adjusted Gross Income (MAGI) Limits and Phaseouts

This is where many taxpayers will quietly fall out of eligibility.

The deduction is subject to Modified Adjusted Gross Income (MAGI) limits that vary by filing status. Once your income exceeds the threshold for your filing status, the deduction begins to phase out, eventually disappearing entirely.

Conceptually, the structure works like this:

• Below the threshold: full deduction

• Inside the phaseout range: partial deduction

• Above the phaseout range: no deduction

The exact thresholds and ranges depend on your filing status, and they matter far more than the sticker price of the car.

• Married-filing-joint filers: MAGI cap is $200k and phases out at $250k

• All other filers: MAGI cap is $100k and phases out at $150k

This is a classic Congressional move: advertise a broadly appealing deduction, then narrow it with income limits.

Car Loan Interest Deduction Calculator

How Much Is This Deduction Actually Worth?

For most taxpayers, the value of this deduction will be modest.

Why?

• It applies only to interest, not the full loan payment

• Auto loan interest is front-loaded, so later years matter less

• Income phaseouts often reduce or eliminate the benefit

In many cases, we’re talking about hundreds to about two thousand dollars per year. That’s real money but it’s certainly not enough to justify a bad purchase decision.

People who qualify for this deduction will mostly be in the 22% bracket. So if your qualifying car loan interest is $7,000, the tax impact will be $1,540.

End-of-Year Timing: Don’t Let the Tax Tail Wag the Purchasing Dog

Because I’m writing this in mid-December, it’s worth addressing the elephant in the room.

Any time a new deduction shows up near year-end, people feel pressure to act:
“If I buy before December 31, I get the tax break.”

That isn’t wrong, but it can be expensive.

If you were already planning to buy a new car, the financing makes sense, and the vehicle fits your life, then the deduction is a nice bonus. Take it.

But using a tax deduction to justify a major purchase is almost always backwards.

A car is still a depreciating asset. This deduction doesn’t change that. It doesn’t touch principal, and it doesn’t come close to offsetting the cost of buying a vehicle you didn’t actually need.

Spending $40,000 to $60,000 to save a few hundred dollars in taxes is not tax planning, it’s rationalization.

This is one of those moments where the rule applies cleanly: don’t let the tax tail wag the purchasing dog. Good financial decisions come first. Tax incentives follow—never the other way around.

What About Business Use?

If the vehicle is used partly for business, additional complexity enters the picture:

• Allocation between personal and business use

• Interaction with Schedule C or S-Corporation rules

• Potential limitations on double-dipping deductions

Until we have clear IRS guidance on how this new deduction interacts with existing business vehicle rules, conservative treatment is advised.

The Bottom Line

This new car loan interest deduction is real—but it’s narrow, income-limited, and often overstated in casual conversations.

If you:

• Were already buying a new car

• Qualify under the income limits

• Confirm U.S. final assembly

• Have meaningful interest expense

Then the deduction is worth taking.

Just don’t let a modest tax benefit talk you into a purchase that doesn’t make sense on its own. Congress writes incentives to steer behavior. Your job is to decide whether the behavior actually serves you.

Frequently Asked Questions (FAQ)

Is this a tax credit or a tax deduction?

It’s a tax deduction, not a credit.

That means it reduces your taxable income, not your tax bill dollar-for-dollar. The actual value depends on your marginal tax rate and whether you’re subject to the income phaseout.

Do I have to itemize deductions to claim this?

No.

This deduction is claimed on Schedule 1-A, not Schedule A. You can take it even if you use the standard deduction.

Does this apply to used cars?

No.

The vehicle must be new. Used vehicles do not qualify, even if they’re “new to you.”

What if I refinance my car loan?

As of now, refinancing an existing loan generally does not qualify.

The deduction is intended for interest on a qualified purchase loan tied to a new vehicle. We expect IRS guidance to further clarify edge cases, but refinancing purely to generate deductible interest is unlikely to be allowed.

Does the brand of the car matter?

No.
The final assembly location matters not the brand.

Some vehicles sold by foreign manufacturers qualify. Some vehicles sold by American manufacturers do not.

How do I verify where the car was assembled?

You can use the official NHTSA VIN Decoder.

You’ll need:

• The vehicle identification number (VIN)

• The model year

The tool will show the final assembly location.

VIN Decoder: https://vpic.nhtsa.dot.gov/decoder/

If final assembly was not in the United States, the deduction is not available.

Is there a limit to how much interest I can deduct?

The practical limit comes from:

• The amount of interest you actually paid

• The income phaseout based on your filing status

Even if your loan generates significant interest, the deduction may be reduced or eliminated once your income exceeds the applicable MAGI range.

What income does the IRS use for the phaseout?

The phaseout is based on Modified Adjusted Gross Income (MAGI), not just AGI.

MAGI adds certain items back to AGI like social security income, depending on your situation. This is a common area where taxpayers assume they qualify and later find out they don’t.

If I’m over the income limit, can I still claim part of the deduction?

Possibly.

If your income falls within the phaseout range, you may be eligible for a partial deduction. Once you exceed the top of the range for your filing status, the deduction goes to zero.

Does leasing a car qualify?

No.

This deduction applies to interest paid on a loan. Lease payments are not interest on a purchase loan and do not qualify.

What if I use the car partly for business?

That adds complexity.

You may need to:

• Allocate interest between personal and business use

• Coordinate this deduction with Schedule C or S-Corporation vehicle rules

• Avoid double-dipping on deductions

Until the IRS issues clear guidance on how this deduction interacts with business vehicle treatment, conservative allocation is recommended.

Is this deduction worth buying a car for?

Almost never.

For most taxpayers, the tax savings will be modest, often measured in hundreds of dollars per year. That’s not enough to justify a large, last-minute purchase.

If you were already buying the car, fine, take the deduction. But don’t let the tax tail wag the purchasing dog.

Will this deduction still exist next year?

As of now, the deduction applies for tax years 2025 through 2028.

If you’re making a major financial decision, assume the tax benefit is temporary, not permanent.