New Car Loan Tax Deduction: What You Need to Know
If you purchased a new vehicle last year, you may be eligible for a beneficial tax break. The newly implemented tax deduction allows taxpayers to deduct the interest paid on their auto loans, offering potential financial relief amidst rising car ownership costs.
Understanding the Car Loan Tax Deduction
Originating from the Republicans’ recent legislation, the car loan tax deduction was made official by President Trump last summer. Initially proposed during his 2024 campaign, the aim was to make car ownership “dramatically more affordable” while promoting domestic automotive production.
Who Can Benefit from This Deduction?
Experts suggest that this new deduction could significantly benefit eligible taxpayers. Andrew Lautz from the Bipartisan Policy Center noted, “The auto loan interest deduction could reduce taxes by hundreds or even thousands of dollars, with millions of taxpayers poised to claim this benefit this year.” Given that car ownership expenses are at an all-time high, this relief may come as a crucial financial advantage.
Eligibility and Restrictions
It’s important to note that various restrictions apply to this tax break. Only new American-made vehicles qualify for the deduction, excluding used purchases or leases. Jeremy Robb, chief economist at Cox Automotive, estimated that around 4 million of the 13.4 million new cars sold in the U.S. last year would qualify. A typical eligible purchaser could expect to claim about $4,000 on their tax returns.
How Does the Deduction Work?
The IRS has outlined the structure of the car loan deduction, which allows taxpayers to deduct up to $10,000 annually on interest paid for loans on new vehicles purchased last year. The deduction applies separately for each spouse if married couples file their taxes separately, maximizing the potential benefits.
Income Limits and Eligibility Criteria
To fully benefit from the auto loan deduction, single taxpayers with modified adjusted gross incomes of up to $100,000 and couples earning up to $200,000 are eligible. The deduction amount diminishes by $200 for each $1,000 above these thresholds. This tax benefit applies to both standard and itemized deductions, effectively reducing taxable income.
Claiming the Deduction
To claim this tax break, gather your auto loan statements from 2025 and complete a Schedule 1-A form, detailing your income, loan information, and Vehicle Identification Number (VIN). Ensure that this is submitted alongside your tax return for consideration.
Duration of the Tax Break
The car loan deduction will remain available for new vehicles purchased between January 1, 2025, and December 31, 2028. After 2028, this tax break is set to expire unless further legislation is introduced to extend it.
Potential Savings
The potential tax savings from the auto loan deduction could range from hundreds to thousands of dollars, depending on individual income levels and the size of the auto loan. The American Financial Services Association estimates that eligible buyers at a 6.5% loan rate might deduct around $3,000 in the first year and about $1,800 annually over the life of the loan.
