The Big Beautiful Bill has introduced a brand-new tax break for certain car buyers: an auto loan interest deduction. Starting with the 2025 tax year, eligible buyers of new, U.S.-assembled vehicles may be able to deduct up to $10,000 per year in interest paid on their auto loans.
While the potential savings sound appealing, the rules are strict — and the deduction is only available for a limited time. Here’s what you need to know.
Who Qualifies?
To be eligible for the deduction:
- The vehicle must be new — used cars and leases do not qualify.
- Final assembly must take place in the United States.
- The loan must be from an unrelated lender, such as a bank or credit union. Loans from friends, family, or informal arrangements are not eligible.
- Your income must fall below certain thresholds:
- Phase-out begins at $100,000 for single filers and $200,000 for married couples filing jointly.
- Deduction fully phases out at $149,000 for individuals and $249,000 for joint filers.
Above-the-Line Deduction
This deduction is above the line, meaning you don’t need to itemize your taxes to claim it. You can still take the standard deduction and reduce your taxable income by the amount of eligible interest.
How Much Could You Save?
Example:
If you take out a $50,000 loan at 8% interest over 60 months, you’d pay about $3,700 in interest in the first year.
At a 22% tax rate, that could equal around $813 in federal tax savings.
However, reaching the $10,000 annual deduction cap is rare — analysts estimate fewer than 1% of borrowers will do so. To hit the maximum, you’d need to finance more than $110,000 at a high interest rate in a single year.
Temporary Benefit
The deduction applies only for tax years 2025 through 2028. If you take out a six- or seven-year loan, you’ll only get the benefit for the first four years.
Eligible Vehicles
Most cars, trucks, SUVs, vans, and motorcycles under 14,000 pounds manufactured for U.S. roads could qualify, provided their final assembly is in the U.S.
Common U.S.-assembled models include:
- Toyota Camry
- Ford F-150
- Subaru Outback
- Jeep Wrangler
- Honda Accord
Final assembly locations can change by year and trim, so always verify. You can:
- Check the window sticker at the dealership.
- Use your VIN on the NHTSA website.
Note: Some popular models, such as the Toyota Tacoma or Chevy Equinox, may be built outside the U.S. or split across multiple countries — making verification essential.
Who Benefits Most?
This deduction is likely most valuable for middle-income buyers who finance vehicles at higher interest rates and keep them for several years. High-income households who pay cash or lease vehicles will likely see no benefit.
Final Takeaway
With strict eligibility rules and a four-year window, this auto loan interest deduction is a niche but potentially significant savings opportunity. Before making a purchase with this deduction in mind, consult a tax professional to confirm your eligibility.
If you have questions, contact Paragon today.
