Bought A New Car? You May Be Able To Deduct The Loan Interest

If you financed a new vehicle recently, there may be a new tax break worth knowing about.

For tax years 2025 through 2028, eligible taxpayers can deduct up to $10,000 per year in interest paid on a qualifying passenger vehicle loan.

Unlike many deductions, this one is available whether you itemize deductions or take the standard deduction.

But not every vehicle or loan qualifies.

Which Vehicles Qualify?

To be eligible, the vehicle generally must:

  • Be purchased new
  • Be intended for personal use
  • Have its final assembly completed in the United States
  • Have a gross vehicle weight rating under 14,000 pounds
  • Fall within a qualifying vehicle category, such as a car, SUV, pickup truck, minivan, van or motorcycle

Used vehicles do not qualify.

The IRS also requires the vehicle’s original use to begin with the taxpayer claiming the deduction.

How Can You Tell Where a Vehicle Was Assembled?

A vehicle does not automatically qualify simply because it is sold by an American automaker.

What matters is where the vehicle underwent final assembly.

The IRS recommends checking the vehicle information label at the dealership or using the Vehicle Identification Number, or VIN, to confirm where final assembly occurred.

That means buyers who want to take advantage of the deduction should verify eligibility before assuming their vehicle qualifies.

The Loan Has to Qualify, Too

The deduction applies to interest paid on debt used to purchase the qualifying vehicle.

Generally, the loan must:

  • Have been incurred after December 31, 2024
  • Be used to purchase the vehicle
  • Be secured by a first lien on the vehicle
  • Be associated with a vehicle used primarily for personal purposes

Interest on a lease does not qualify.

The IRS has also clarified that certain amounts commonly financed as part of a vehicle purchase, such as warranties or service plans, may be included in the qualifying indebtedness when they are directly related to the vehicle purchase.

How Much Can You Deduct?

The maximum deduction is $10,000 per tax return each year.

However, the deduction begins to phase out for taxpayers with modified adjusted gross income above:

  • $100,000 for single filers
  • $200,000 for married couples filing jointly

As income rises above those thresholds, the available deduction is gradually reduced.

You Don’t Have to Itemize

One of the more significant features of the new deduction is that taxpayers can claim it even if they take the standard deduction.

That makes the tax benefit potentially available to a much broader group of taxpayers than many traditional interest deductions.

Taxpayers generally claim the deduction on Schedule 1-A of Form 1040 and will need to provide the vehicle’s VIN when claiming it.

Keep Your Loan Records

If you plan to claim the deduction, keep documentation showing:

  • The date the vehicle was purchased
  • The VIN
  • The amount of interest paid during the year
  • Loan documentation
  • Evidence that the vehicle meets the U.S. final-assembly requirement

Lenders may also provide information showing how much qualifying interest was paid during the year.

A Tax Break Is Still Only Part of the Equation

The potential deduction can make financing a qualifying vehicle somewhat less expensive, but it shouldn’t be the sole reason to purchase a particular vehicle or take on a larger loan.

Vehicle price, loan terms, interest rate, insurance, depreciation and other ownership costs should still factor into the decision.

If you purchased or are considering purchasing a new vehicle, Fast Forward Accounting can help you determine whether your loan interest qualifies for the deduction and how the benefit may affect your overall tax situation.

 

Source:  Kiplinger