Big Beautiful Bill No Tax on Car Loan Interest changes explained

Deduct up to $10,000 in car loan interest

“No Tax on Car Loan Interest” is a new deduction that’s part of the One Big Beautiful Bill Act (OBBBA) signed into law on July 4, 2025. This write-off allows eligible taxpayers to deduct up to $10,000 in car loan interest on a qualifying vehicle from their taxable income for tax years 2025 through 2028.

The new car loan interest write-off is an “above-the-line” deduction. That means you can claim the deduction to reduce your income before calculating your adjusted gross income (AGI), even if you choose to take the standard deduction instead of itemizing.

Who qualifies for the new car loan interest deduction?

All taxpayers who meet the income eligibility requirements qualify for the new car loan interest deduction, regardless of whether you take the standard deduction or itemize.

The No Tax on Car Loan Interest deduction starts phasing out for taxpayers with a modified adjusted gross income (MAGI) greater than $100,000 for single filers and $200,000 for joint filers. It phases out by $200 for each $1,000 over the threshold limit, and is no longer available at a MAGI of $150,000 for single filers and $300,000 for joint filers.

Here’s an example:

Let’s say you are a single filer with a MAGI of $120,000, which is $20,000 over the phase-out limit. That means your deduction gets reduced by $200 for each $1,000 you’re over.

Start by dividing the amount exceeding the limit by $1,000:

$20,000 ¸ $1,000 = 20

Then multiply by $200 to find the total reduction:

20 × $200 = $4,000

Subtract the reduction amount from the maximum deduction amount to find your new maximum deduction amount:

$10,000 − $4,000 = $6,000.

So, with a MAGI of $120,000, you’d be eligible to claim up to $6,000 of the car loan interest deduction instead of the full $10,000.

Which vehicles qualify for the car loan interest deduction?

There are several requirements a vehicle must meet to qualify for the No Tax on Car Loan Interest deduction:

• You must have purchased the vehicle after December 31, 2024, and before January 1, 2029.
• The vehicle must be new. Used vehicles do not qualify.
• The vehicle must be a car, SUV, pickup truck, minivan, van, or motorcycle that has a gross vehicle weight rating of less than 14,000 pounds.
• The final assembly of the vehicle must have been in the U.S. The final assembly location for your vehicle should be listed on the sticker located on the driver’s side doorjamb. You can also use the VIN decoder on the National Highway Traffic Safety Administration (NHTSA) website to find the final assembly location.
• The vehicle must be for personal use only. If you use the vehicle for business purposes, there are other deductions you may be able to take, and different rules apply.
• The loan you took out for the vehicle must come from a qualified lender (friends or family don’t count), be secured by a lien on the vehicle, and have originated no earlier than January 1, 2025.

How to calculate interest on a car loan

To calculate interest on a car loan, you’ll need the principal of the loan, which is the total amount you borrowed, the annual percentage rate (APR), and the length of the loan.

The first thing you’ll do is calculate your monthly percentage rate by dividing your annual rate by 12.

For example, if you’ve taken out a loan with a 6% APR, your monthly rate would be 0.5%.

From there, calculate the interest you pay by multiplying your monthly rate by the principal amount you owe. So, if your monthly rate is 0.5% and the loan amount is $20,000, you’d pay $100 in interest for the first month.

Keep in mind that the interest changes, and the amount you pay will decrease each month as you pay down the principal of the loan.

There are also many auto loan calculators online you can use to calculate auto loan interest. Additionally, you can look at your monthly statements to determine the amount of interest you’ve paid for the year so far.

Can you get the car loan interest tax deduction when you file 2025 taxes?

Yes, you can take the new car loan interest deduction when you file your 2025 taxes. The No Tax on Car Loan Interest deduction applies to all eligible car loans originated after December 31, 2024.

Please note that the new car loan interest deduction is temporary. It will no longer be available after tax year 2028.

What documents are needed for the car loan interest deduction?

Borrowers who take the No Tax on Car Loan Interest deduction must submit Form Schedule 1-A, with your vehicle’s VIN, in addition to Form 1040. It’s also smart to gather all documentation you have regarding the loan in case of an audit. This may include:

• Signed loan agreement
• Vehicle purchase documents, such as bill of sale, title, etc.
• Monthly loan statements

Because this deduction is new for 2025, the IRS has made it easier for lenders by requiring that they only provide a simple statement of interest paid, instead of an official IRS form. However, starting in 2026, lenders will be required to provide Form 1098 to report interest paid.

Will I qualify for the car loan deduction if I refinance?

Yes, if you refinance a qualified vehicle, you are generally eligible to deduct interest you’ve paid on the refinanced amount, as long as you meet the following conditions:

• The original loan must have been for personal use on a new, eligible vehicle originated after December 31, 2024.
• You can only deduct interest paid on the balance of the original loan. If you borrow any amount above the original balance, that interest does not qualify for the deduction.
• The refinanced loan must be secured by a lien on the vehicle.

The No Tax on Car Loan Interest deduction could mean less tax or maybe even a bigger refund for many taxpayers, but the write-off is not quite as straightforward as the name implies. There are many rules and requirements you need to be aware of, and there may be consequences if you claim this deduction improperly.

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