A new federal tax deduction allows some car buyers to deduct up to $10,000 in annual loan interest on new vehicles assembled in the United States through 2028. The deduction was created under the One Big Beautiful Bill Act, which was signed into law on July 4, 2025, and applies to qualifying vehicles purchased after December 31, 2024.

The deduction applies to new cars, trucks, SUVs, vans, and motorcycles weighing less than 14,000 pounds that are financed with a loan. It does not apply to used vehicles or leases. Single taxpayers with modified adjusted gross income of $100,000 or more are not eligible, and married couples filing jointly with income of $200,000 or more also do not qualify.

According to IRS guidance issued after the law was enacted, taxpayers may claim the deduction whether or not they itemize. The interest is reported on Schedule 1-A, Part IV, which requires the vehicle identification number and lender information.

The amount of tax savings depends on how much interest a taxpayer pays and the taxpayer’s marginal tax rate. For example, a buyer with a $40,000 new vehicle loan at 7 percent interest would pay about $2,800 in interest during the first year of the loan. The deduction reduces taxable income rather than providing a tax credit.

Vehicle eligibility depends on final assembly in the United States. The National Highway Traffic Safety Administration provides a VIN decoder tool that shows assembly location based on the 11th digit of the vehicle identification number. Vehicles assembled in the United States include some models produced by domestic and foreign automakers at U.S. plants.

The deduction for personal vehicles is separate from tax provisions that apply to business vehicles. Business owners may be eligible for other deductions under federal tax law for qualifying vehicles used for business purposes.

The vehicle loan interest deduction was included in a broader tax package that also contained other tax provisions, including deductions for overtime pay and changes to child tax credits. The vehicle deduction is scheduled to remain in effect through 2028 unless Congress extends it.

Taxpayers claiming the deduction must keep records showing interest paid on the loan, the vehicle identification number, and purchase documents. The deduction applies to interest paid during each tax year from 2025 through 2028 for taxpayers who meet the income limits and other eligibility requirements.

Source: The $10,000 car loan tax deduction: Here’s who qualifies and how to claim it | Fox13 Seattle