For years, the IRS has generally disallowed deductions for personal interest — with a major exception for home mortgages. That changed with the passage of the One Big Beautiful Bill Act (OBBBA), which temporarily adds another carve-out: a deduction for certain car loan interest.

A Clarification on “Tax-Free”

Some outlets are calling this a “no tax” rule on auto loan interest, but that oversells it. You’re not skipping tax altogether; instead, you’re able to deduct qualifying interest, which effectively lets you cover part of your loan costs with pre-tax dollars.

Core Features of the New Deduction

• Effective for 2025 through 2028.
• You may deduct up to $10,000 of qualifying car loan interest per year.
• Applies whether or not you itemize deductions.
• The loan must be a first-position lien and backed by the vehicle itself.
• Vehicle must be for personal, not business, use.
• Leases aren’t included.

Income Limits to Watch

Phaseouts apply as follows:

• Phaseouts start at $100,000 for single taxpayers.
• Phaseouts start at $200,000 for couples filing jointly.
• Deduction shrinks by $200 for every $1,000 of income above those thresholds.
• At $150,000 (single) or $250,000 (joint), the benefit disappears completely.

What Vehicles Count

• The vehicle is brand new (you are the first owner).
• Final assembly takes place in the United States.
• The vehicle Identification Number (VIN) is reported on your return.
• It weighs under 14,000 pounds.
• Eligible types include: cars, SUVs, vans, minivans, pickups, and motorcycles.

Refinancing Rules

A refinanced loan can still qualify if both conditions hold:

• The refinanced loan remains a first lien on the vehicle.
• The new loan balance does not exceed what was left on the original.

What Doesn’t Qualify

• The purchase involves a fleet of vehicles.
• The car is used mainly for business.
• The vehicle has a salvage title or is purchased for scrap/parts.
• Financing is provided by certain related parties.
• The vehicle is leased instead of purchased.

Other Conditions

Your lender must report the amount of interest you paid each year directly to the IRS. Also, the law requires U.S. “final assembly,” meaning the car must leave the factory ready for operation here in the States.

Bottom Line

Since most Americans finance their vehicles, the chance to deduct car loan interest is welcome news. Still, it comes with strings attached. High earners, used-car buyers, and those opting for foreign-built models won’t see a benefit. If you’re planning to buy a new car in the next few years, it’s worth reviewing these rules to see whether your financing could bring some extra tax relief.

Summary Table of Rules

Category	Key Rules
Eligibility	Available to taxpayers with qualifying new car loans, 2025–2028, up to $10,000/year of interest.
Income Limits	Phaseout begins at $100,000 MAGI (single) / $200,000 (joint). Fully phased out at $150,000 (single) / $250,000 (joint).
Qualifying Vehicles	New vehicles under 14,000 lbs; cars, SUVs, vans, pickups, motorcycles. Must be assembled in the U.S. and VIN reported.
Refinancing	Still allowed if loan remains a first lien and balance does not exceed remaining original loan balance.
Exclusions	No leases, salvage vehicles, business or fleet purchases, loans from related parties.
Other Requirements	Lender must file IRS information return showing interest paid.