Under the One Big Beautiful Bill Act interest paid on certain car loans would become tax-deductible. If you purchased a personal-use vehicle after December 31, 2024, and financed it with a qualified loan, you may be able to deduct up to $10,000 in interest per year through 2028, even if you don’t itemize. However, income phaseouts and eligibility restrictions apply, and not every car or loan will qualify.
A financial advisor can help you determine whether your next car loan qualifies and how to optimize your overall tax strategy.
Key Takeaways:
- Deductible car loan interest: Interest on qualified personal-use car loans issued after December 31, 2024, may be deductible up to $10,000 per year (through 2028).
- No itemizing required: This deduction is available even if you claim the standard deduction.
- Limits apply: Eligibility depends on the type of vehicle, the loan terms and your income level, with phaseouts and restrictions potentially limiting who can claim it.
What Is the New Auto Deduction in the Trump Tax Plan?
The One Big Beautiful Bill Act introduces a temporary, but impactful, tax break for car owners. It allows for a federal income tax deduction on interest paid for personal vehicle loans. This auto deduction would apply to car loans taken out between January 1, 2025 and December 31, 2028.
This means individuals financing a personal-use car, truck or SUV during that window could claim a deduction. They could get up to $10,000 per year deduction for loan interest, even if they use the standard deduction.
However, this deduction doesn’t apply across the board. It excludes leased vehicles, business-use autos, fleet purchases, used vehicles, and loans for salvage-title or scrap-intended cars.
Who Qualifies for the Auto Deduction?
To benefit from the new auto deduction, you must meet several requirements:
- The loan must begin after December 31, 2024
- The vehicle must be used for personal purposes
- The loan must be secured by a first lien on the car
- The vehicle must be assembled in the U.S.
Qualifying vehicles include cars, SUVs, pickups, motorcycles, trailers, campers and ATVs. To qualify, they must primarily be for personal use and meet the assembly requirement.
Income Phaseouts
The deduction begins to phase out if your modified adjusted gross income (MAGI) exceeds:
- $100,000 for single filers
- $200,000 for joint filers
For every $1,000 over the threshold, your deduction shrinks by $200 (and gets fully phased out for single filers with income over $149,000 and joint filers over $249,000).
How to Structure a Car Loan to Maximize the Deduction
It’s important to structure your car loan correctly to get the full benefit of the Trump Tax Plan’s auto deduction. Not every financing arrangement will qualify, and small mistakes could cost you the ability to claim the deduction.
- Choose a loan with a first lien: The deduction only applies to loans secured by a first lien on the vehicle, which means your lender has the primary claim if you default. This is standard for most auto loans, but if you’re using a personal loan or secondary financing, you may not qualify.
- Opt for a reasonable loan term: While longer terms lower your monthly payments, shorter loans help you pay more interest upfront, maximizing what you can deduct during the plan’s limited time window (2025–2028). A 36- or 48-month term could allow you to reap more benefit within the eligible years.
- Avoid unqualified financing structures: The auto deduction doesn’t apply to leases, lease-purchase hybrids, or unsecured personal loans used to buy a car. Be sure the loan is clearly tied to a single, eligible vehicle and not mixed with other types of debt or purchases.
Frequently Asked Questions About the Auto Deduction
Can You Refinance and Still Deduct?
Yes, refinanced loans are eligible but only if the new loan doesn’t exceed the principal balance of the original. This provision allows flexibility for borrowers looking to secure a better interest rate without losing tax benefits.
Can I Deduct Interest If I Buy the Car in Cash?
No. The auto deduction only applies to interest paid on qualified car loans. If you pay in full upfront, there’s no interest, and therefore nothing to deduct.
Does This Deduction Apply to Electric Vehicles?
Yes, electric vehicles qualify. They must meet the same standards as any other eligible car: it must be a personal-use vehicle, purchased after December 31, 2024 and assembled in the United States.
If I Trade in My Car, Do I Lose the Deduction?
If you trade in a vehicle tied to a qualifying loan, you’ll stop accruing interest on that original loan, and with it, the associated deduction. However, if your new loan also meets the deduction requirements, you might be able to still claim interest on the new vehicle going forward.
Bottom Line
The proposed auto deduction in the Trump Tax Plan could allow drivers who finance a personal vehicle between 2025 and 2028 to deduct up to $10,000 per year in interest, even for those who don’t itemize. But the benefits come with restrictions: your vehicle must be for personal use, meet U.S. assembly requirements and your income can’t be too high. It’s also a limited-time offer that may sunset after 2028.
Tax Planning Tips
- A financial advisor can help you mitigate risk for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.
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