Qualifying for the new car loan interest deduction

According to the recently enacted “One Big Beautiful Bill Act,” for years 2025 through 2028, interest on new car loans for personal vehicles can be deducted from your taxable income, even if you don’t itemize your deductions. To take the deduction, a few qualifications must be met.

• The loan must be new (incurred after Dec. 31, 2024) and secured by a first lien on the qualifying vehicle, meaning it is a brand-new vehicle that no one else has used or owned. Refinanced loans can qualify, but only up to the amount of the original loan. Loans from related parties do not qualify.

• The maximum amount of interest that can be deducted per taxpayer per year is $10,000.

• The deduction is reduced by $200 for each $1,000 (or part thereof) by which the taxpayer’s modified adjusted income (MAGI) exceeds: $100,000 for single filers and $200,000 for joint filers.

• The taxpayer must report the vehicle identification number on their tax return.

• The cars, minivans, trucks and motorcycles must be brand new, have been assembled in the United States and the original use must have begun with the taxpayer (i.e., the buyer is first user). Fleet vehicles, commercial vehicles, leased vehicles do not qualify

Example: Katie buys a brand-new SUV in May 2025 for her own personal use. The SUV was assembled in the U.S. and Katie is the first user. She takes out a $40,000 loan at 6 percent interest, secured by a first lien on the vehicle. In 2025, she pays $2,300 in interest on the loan, Her MAGI is $95,000. Katie can deduct the full $2,300 on her 20025 tax return, since the interest she paid is less than $10,000, the annual cap.

Barry Lisak is an IRS enrolled agent specializing in personal and small business taxes for 30 years. Any questions can be directed to him at 516-829-7283, or mrbarrytax@aol.com.