What You Need to Know About the New Deduction for Interest on Car Loans

With the cost of new vehicles rising, cars, trucks and SUVs are an increasingly significant budget item for many Americans. The One Big Beautiful Bill Act (OBBBA), which was signed into law last year, may provide some relief for taxpayers trying to help manage their debt. A provision called “No Tax on Car Loan Interest” allows taxpayers to deduct up to $10,000 per year in interest they’ve paid on loans for newly purchased vehicles made in the U.S.

The auto loan interest deduction is available to both taxpayers who itemize their deductions and those who don’t. That’s a contrast to the mortgage loan interest deduction, which can be used only by taxpayers who itemize their deductions.

While the car loan interest deduction offers a new opportunity for taxpayers to lighten their tax burden, it comes with a number of rules and exceptions. Here’s what you need to know if you’re wondering whether this tax deduction applies to you.

Vehicle requirements for the car loan interest deduction

The car loan interest deduction is available only for the purchase of a new vehicle; leased or used vehicles are not eligible. The vehicle loan must also be secured via a lien. The IRS defines vehicles eligible for the tax deduction as “a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds.”

In addition to being a new purchase, a vehicle’s final assembly must have occurred in the U.S. According to the IRS, this qualification can be determined by checking the vehicle information label found on a new vehicle at a dealer. Taxpayers can also use the VIN Decoder database maintained by the National Highway Traffic Safety Administration (NHTSA) to see if a vehicle’s “plant of manufacture” location is listed as the United States.

Purchase window for deduction eligibility

To be eligible for the new car loan interest deduction, you must have purchased your vehicle after December 31, 2024. While the bill was signed in July of 2025, it’s retroactive. So, if you purchased a new car with a loan in January 2025 and you meet all the other requirements, you’d be eligible to deduct up to $10,000 of interest when you file your 2025 taxes.

The provision is currently set to run through 2028, so the tax break is valid for qualifying vehicles purchased from January 1, 2025, through December 31, 2028.

A changing target for personal use

When the OBBBA was signed, the initial wording stated that vehicles eligible for the tax break must be purchased for personal use only—those used for commercial purposes would not be eligible.

However, as of early 2026 the IRS was still finalizing its guidance on the tax break. Its proposed rule suggests that eligible vehicles must be for personal use more than 50 percent of the time, which may leave more leeway for individuals who use their vehicles for both personal and business use. The rules will be finalized after a public hearing, currently scheduled for late February 2026.

Understanding the income requirements for the car loan interest deduction

The auto loan interest tax provision phases out deductions for those with high incomes. Deductions start to phase out for individual taxpayers earning more than $100,000 per year and for joint filers whose gross income exceeds $200,000.

If you purchased a new vehicle after December 31, 2024, and you’re paying interest on a loan for the vehicle, you may be eligible for this new deduction. Consult your tax professional for more information.

Maximizing your tax deductions amid changing policies

The auto loan interest deduction is just one of many changes the OBBBA may make to your 2025 taxes. As you’re gathering information to file your return, reach out to your Northwestern Mutual financial advisor to discuss how these changes may affect your long-term finances. Together, you can adjust your financial plan accordingly.

This article is not intended as legal or tax advice. Northwestern Mutual and its financial representatives do not give legal or tax advice. Taxpayers should seek advice regarding their particular circumstances from an independent legal, accounting or tax adviser.