The question of whether car loan interest is tax-deductible has a complex answer, dependent on vehicle usage and purchase timing. For years, the IRS treated car loan interest as a non-deductible personal expense. However, a temporary federal law—effective for tax years 2025 through 2028—offers a potential tax break to some car buyers. This guide breaks down the new rules clearly.
The Historical Rule: Why Car Loan Interest Was Traditionally Non-Deductible
Historically, the IRS classified car loan interest as personal interest under Section 163 of the Internal Revenue Code, making it generally ineligible for tax deductions. This meant that interest paid on car loans for commuting, personal errands, or education was not deductible.
The 2025-2028 Deduction: A Temporary Change
The new law allows taxpayers to deduct up to $10,000 in car loan interest, provided specific conditions are met. This is an above-the-line deduction, meaning it can be claimed even if you take the standard deduction, lowering your adjusted gross income (AGI) directly.
Qualifying Vehicles: The Fine Print
The deduction applies only to vehicles that meet these criteria:
- New, not used: The vehicle must be purchased new.
- Purchase date: Acquired after December 31, 2024, and before January 1, 2029.
- Final assembly: Assembled in the United States.
- Weight limit: Weighs less than 14,000 pounds.
- Personal use: Primarily for personal use (at least 50%).
Failure to meet any of these conditions disqualifies the deduction.
Income Limits and Phase-Out Rules
The deduction phases out based on income. Taxpayers exceeding certain modified adjusted gross income (MAGI) limits will not qualify. Consult IRS guidelines for specific thresholds.
Business Use: The Unchanged Rule
Self-employed individuals can deduct the business-use portion of car loan interest, as before. To calculate this, determine the percentage of business mileage and multiply it by the total interest paid. This deduction is reported on Schedule C. For example, if you paid $1,500 in annual interest and used the vehicle 40% for business, you can deduct $600.
When Car Loan Interest Remains Non-Deductible
The following situations do not qualify for the deduction:
- Used vehicles
- Leased vehicles
- Vehicles exceeding 14,000 pounds
- Income exceeding the limits
- Claiming commuting as business use
Real-World Examples
- New Car Purchase (2026): A taxpayer buys a qualifying car in 2026 and pays $6,500 in interest. If their income is under the limit, they can deduct the full amount.
- Self-Employed Consultant: A consultant using the vehicle 70% for business can deduct 70% of the interest paid.
- W-2 Employee Commuting: An employee driving to work cannot deduct interest for commuting.
Record-Keeping
To support the deduction, maintain the following records:
- Loan statements
- Form 1098 (if issued)
- Purchase agreement
- Window sticker (showing assembly location)
- Mileage logs (for business use)
The IRS recommends keeping tax records for at least three years.
Common Mistakes to Avoid
- Claiming deductions for used vehicles.
- Incorrectly categorizing commuting as business mileage.
- Overstating deductions without proper documentation.
“A tax break should not drive the purchase—your budget should.”
In conclusion, car loan interest is generally not deductible, but a temporary law from 2025-2028 offers a potential break for those who purchase new, U.S.-assembled vehicles under specific income and usage conditions. Self-employed individuals can continue deducting business-use interest with proper documentation.
