NEW INTEREST DEDUCTION FOR US VEHICLE PURCHASES

New Interest Deduction Encourages U.S. Vehicle Purchases

Starting with vehicles purchased in 2025, qualifying car buyers can claim a tax deduction of up to $10,000 per year for interest paid on an auto loan used to purchase a new vehicle that was assembled in the United States. This deduction applies for tax years 2025 through 2028, and — importantly — taxpayers don’t have to itemize deductions to claim it.

The provision is part of a broader legislative push to support domestic production and consumer spending on American-made goods, and it signals a major shift in how federal tax policy intersects with the automotive market.

Who Qualifies for the Credit?

To claim the deduction on your 2025 tax return:

• Your auto loan must originate after December 31, 2024.

• The vehicle must be new and assembled in the United States, as indicated by the Vehicle Identification Number (VIN) and manufacturer information.

• The vehicle must be for personal use — business and commercial vehicles generally do not qualify.

• You must actually pay interest on the loan during the tax year, and the maximum annual write-off is $10,000.

The exemption applies regardless of whether a taxpayer chooses the standard deduction or itemizes.

Income Limits and Phaseouts

The benefit isn’t unlimited. The deduction begins to phase out for individuals with modified adjusted gross income (MAGI) over $100,000 ($200,000 for joint filers), and it shrinks gradually for every additional $1,000 of income above those thresholds.

American-Made Focus

Because this policy is designed to promote U.S. auto production, a vehicle’s final assembly location matters. A final assembly in the United States — often indicated by specific VIN identifiers — is required for the car to qualify.

This emphasis on domestic assembly follows broader federal policy goals tied to boosting American manufacturing and reducing dependence on imported vehicles and parts.

How It Works in Practice

Here’s a simplified example: If you purchase a new car assembled in the U.S. with a loan in 2025 and pay $8,000 in interest over the course of the year, you could deduct that full amount on your federal tax return — lowering your taxable income and reducing your overall tax bill. If your interest paid exceeds $10,000, the excess cannot be deducted.

Important Distinctions From Other Incentives

Although federal electric vehicle (EV) tax credits — which could be worth up to $7,500 for qualifying clean vehicles — remain available in 2025 only for purchases made on or before September 30, 2025 and under specific battery content rules, that program is separate from the new interest deduction and will largely expire thereafter.

This makes the auto loan interest deduction particularly valuable for buyers who plan their vehicle purchase or financing strategy around long-term tax savings.

Looking Ahead

Taxpayers considering a new car purchase in 2025 should weigh several factors — including vehicle assembly, loan terms, income levels and the timing of other credits — to make the most of available tax incentives. Financial advisors recommend checking eligibility early and consulting a tax professional to help ensure the deduction is claimed correctly on 2025 tax returns filed in early 2026.