2025 Car Loan Interest Deduction  

The new deduction for interest on a car loan, created by the One Big Beautiful Bill Act (P.L. 119-21), allows individuals to deduct interest paid on certain loans for new vehicles purchased for personal use. This deduction is available for tax years 2025 through 2028. Below is a comprehensive overview of the requirements, limitations, and key definitions, based on the statute, proposed regulations, and IRS guidance.

1. Who Can Claim the Deduction

• Eligible Taxpayers: Only individuals, decedents’ estates, and non-grantor trusts may claim the deduction. Business entities (such as corporations or partnerships) are not eligible. Grantor trusts are treated as owned by the grantor for this purpose, so the grantor may claim the deduction if otherwise eligible.
• Filing Status: The deduction is available to both taxpayers who itemize deductions and those who take the standard deduction. If married, you must file jointly to claim the deduction.
• Social Security Number: The taxpayer must include their Social Security Number (SSN) on the return for any year the deduction is claimed [3].

2. What Loans Qualify

• Specified Passenger Vehicle Loan (SPVL): The loan must be:
  • Originated after December 31, 2024.
  • Incurred by the taxpayer for the purchase of a new, qualified vehicle (see below for vehicle requirements).
  • Secured by a first lien on the vehicle at the time interest is paid or accrued.
  • For personal use (not for business or investment purposes).
• Refinancing: If a qualifying loan is refinanced, interest on the refinanced amount is generally eligible for the deduction, but only up to the outstanding balance of the original qualifying loan at the time of refinancing. If the obligor changes (other than by reason of death), the new obligor cannot claim the deduction [4].

3. What Vehicles Qualify

• Applicable Passenger Vehicle (APV): The vehicle must:
  • Be a car, minivan, van, sport utility vehicle (SUV), pickup truck, or motorcycle.
  • Have at least two wheels.
  • Be manufactured primarily for use on public streets, roads, and highways (not rail vehicles).
  • Have a gross vehicle weight rating (GVWR) of less than 14,000 pounds.
  • Undergo final assembly in the United States. This can be verified by:
    • The vehicle information label at the dealership,
    • The vehicle identification number (VIN) (using the NHTSA VIN Decoder), or
    • The final assembly point reported on the label affixed to the vehicle.
  • Original use must commence with the taxpayer. The vehicle must be new to the taxpayer (not previously titled or registered to another non-dealer owner). Dealer demonstrators or loaners may qualify if not previously titled/registered and sold as new [4].

4. Personal Use Requirement

• The vehicle must be purchased for personal use, not for use in a trade or business or for investment.
• Personal use is defined as use by an individual other than in a trade or business (except for use as an employee) or for the production of income.
• At the time the loan is incurred, the taxpayer must expect that the vehicle will be used for personal use by the taxpayer, their spouse, or a related individual (as defined in IRC §152(c)(2) or (d)(2)) for more than 50% of the time the taxpayer expects to own the vehicle.
• The determination is made once, at the time the loan is incurred; there is no requirement to track or recertify personal use in later years [4].

5. What Interest Qualifies

• Only interest paid or accrued on the portion of the loan used to purchase the vehicle and items customarily financed in a vehicle purchase transaction that are directly related to the vehicle (e.g., sales tax, title and registration fees, extended warranties, vehicle service plans).
• Interest on amounts not directly related to the vehicle (e.g., negative equity from a trade-in, cash-out proceeds, unrelated property or services, insurance premiums) does not qualify.
• If a loan covers both qualifying and non-qualifying amounts, interest must be allocated on a pro rata basis [4].

6. What Does Not Qualify

• Leases: Lease payments and interest components of leases do not qualify.
• Fleet or Commercial Vehicles: Loans for fleet sales or commercial vehicles not used for personal purposes do not qualify.
• Used Vehicles: Only new vehicles (original use with the taxpayer) qualify.
• Salvage or Scrap Vehicles: Loans to purchase vehicles with a salvage title or intended for scrap/parts do not qualify.
• Related Party Loans: Loans from related parties (as defined in IRC §267(b) or §707(b)(1)) do not qualify [4].

7. Deduction Limits and Phaseout

• Annual Limit: The maximum deduction is $10,000 per tax return, regardless of filing status (i.e., $10,000 total for joint filers, not per spouse).
• Phaseout: The deduction is reduced by $200 for each $1,000 (or portion thereof) by which the taxpayer’s modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for joint filers). MAGI is AGI plus any amounts excluded under IRC §§911, 931, or 933.
  • Example: If a single taxpayer has $124,200 in MAGI and $7,000 in qualifying interest, the deduction is reduced by $5,000 ($200 × 25, since $24,200 over the threshold rounds up to 25), so only $2,000 is deductible [4].

8. Reporting Requirements

• VIN Reporting: The taxpayer must report the VIN of the vehicle on the tax return for any year the deduction is claimed.
• Lender Reporting: Lenders and other recipients of interest must file information returns with the IRS and provide statements to borrowers showing the total amount of interest received during the year, the outstanding principal at the start of the year, the date of loan origination, the year/make/model/VIN of the vehicle, and other required information.
• Transition Relief: For 2025, the IRS has provided transitional guidance allowing lenders to satisfy reporting by providing a statement to the borrower showing the total interest received [2].

9. Interaction with Other Deductions

• If the interest is also deductible as business interest (e.g., for a vehicle used in a trade or business), the taxpayer may choose to deduct it as either QPVLI (subject to the $10,000 limit and phaseout) or as business interest, but not both. The total amount of interest deducted cannot exceed the amount actually paid [4].

10. How to Claim the Deduction

• The deduction is claimed on Schedule 1-A (or successor form) of the individual income tax return. The taxpayer must include the VIN and other required information as specified in IRS forms and instructions.

11. Effective Dates

• The deduction applies to interest paid or accrued on loans originated after December 31, 2024, for tax years 2025 through 2028 [5].

12. Summary Table of Key Requirements