The Car Loan Hack: How a New Tax Law Could Let You Deduct $10,000 in Interest

More than 1 million taxpayers claimed the No Tax on Car Loan Interest deduction for the 2025 tax year. This provision allows eligible filers to deduct up to $10,000 in auto loan interest.

With the average new car loan at about $43,500 with a 6.37% interest rate, most borrowers will pay roughly $7,400 in interest over a standard 60-month loan. How much money could the new car loan interest tax deduction actually save you over the life of your loan, and do you qualify for it? If you’ve already filed your 2025 taxes, can you still claim the benefit?

Here’s what you need to know about how to save money on auto loan interest.

Eligibility for the car loan interest deduction depends on the car, the loan, and the buyer. Here’s what you need to qualify.

Vehicle Requirements

The vehicle must:

• Be brand new (used cars do not qualify)
• Be finally assembled in the U.S. (Check the VIN number)
• Weigh less than 14,000 pounds gross
• Be a sedan, SUV, van, minivan, pickup, or motorcycle (RVs and campers do not qualify)

Loan Requirements

The loan must:

• Have originated after December 31, 2024
• Be a first lien on the vehicle
• Be secured by the vehicle (personal loans and HELOCs do not qualify)
• Not be for a lease (must purchase the car)

Buyer Requirements

Buyers must:

• Be the principal borrower or payor of record on joint loans
• Have a Modified Adjusted Gross Income (MAGI) of $100,000 or less for single filers or $200,000 or less for joint filers to receive the full deduction—The deduction phases out completely at $150,000 for single filers and $250,000 for joint filers
• Use the vehicle for personal purposes more than 50% of the time.

Note: MAGI is your adjusted gross income with certain deductions added back in. It helps determine your eligibility for tax benefits.

If you're self-employed and use your car for both business and personal purposes, your eligibility depends on how much of your driving is personal.

When Personal Driving Is Your Primary Use

You qualify for the OBBBA auto loan interest deduction. You can choose to:

• Claim the full deduction on your personal taxes, or
• Split it between your personal and business deductions, with the business-use portion appearing on Schedule C as a Section 162 trade or business expense.

Note that any interest claimed on your personal taxes can't be claimed again on your business taxes.

"If you're using a vehicle for both business and personal driving, you need up-to-date mileage logs and clear documentation supporting the percentage allocated to business use," says Armine Alajian, CPA and founder of the Alajian Group. "Without that, it becomes very difficult to substantiate the deduction if the IRS asks questions later."

When Business Driving Is Your Primary Use

“For people who use their car a lot for business, it usually makes sense to claim the business expense. The OBBBA deduction was meant for people who commute to work, not for people who drive for companies like Uber,” says George Dimov, CPA and founder of Dimov Tax.

The average borrower will likely see a few hundred to a few thousand dollars in savings over the life of their auto loan. Below are examples of what someone might realistically save.

We assume borrowers take the standard deduction on their taxes, have a 22% marginal tax rate, and are single filers. Online calculators can help you estimate your potential savings.

Borrower B's $110,000 MAGI triggers a $2,000 annual phase-out, cutting their total savings to under 40% of Borrower A's. By 2028, their shrinking interest payments on lower loan balances will zero out the deduction entirely.

Since the No Tax on Car Loan Interest deduction is only available for tax years 2025 to 2028, there would be no interest deduction for later years, even if you still have a loan. And if you took out your car loan in the later years, there’d be fewer savings to be had since the deduction eligibility only starts from the tax year you took out the loan.

How Do You Claim The Deduction?

If you're eligible for the car loan interest tax deduction, you'll claim it on your Schedule 1-A. The deduction is available whether you standardize or itemize your deduction.

What Documents You'll Need

• For the 2025 tax year: You'll need your lender's year-end interest statement.
• From the 2026 tax year onward: Your lender will send you a Form 1098-VLI if you paid $600 or more in interest.

Pro tip: Save your purchase agreement and lender statements for your records.

If You Already Filed and Missed the Deduction

If you've already filed your taxes for the 2025 tax year and missed the deduction, you can still claim it by filing an amended return (IRS Form 1040-X). You generally have three years from your original filing date or two years from when you paid the tax, whichever is later.

The interest loan deduction is a smart way to put some money back in your pocket from a car purchase you would have made anyway. “For the average buyer, a few thousand dollars in deductible interest can still translate into meaningful tax savings over the life of the loan, especially for middle-income households already stretched by insurance, fuel, and maintenance costs,” says Alajian.

However, she urges borrowers not to use the car loan interest tax deduction as a deciding factor in taking on debt. “The smartest approach is to treat the deduction as a bonus, not a justification to overspend. If the loan only makes sense because of the anticipated tax break, that’s usually a sign the purchase may be too aggressive financially.”

Ultimately, understanding how the deduction works and where it fits in your financial picture can help you make a more informed decision. Take the time to compare your loan options, and consider consulting a tax professional to ensure you get the most benefit from any new law.