New Tax Break for Car Buyers: Deducting Interest on Personal Auto Loans

If you're planning to purchase a new personal-use vehicle, there’s a major tax change you’ll want to know about. Thanks to Section 70203 of the recently passed One Big Beautiful Bill Act, individuals may now qualify for a brand-new above-the-line deduction—specifically for interest paid on loans used to buy qualified vehicles. This new deduction could offer significant savings for taxpayers starting in 2025.

What’s New: Car Loan Interest Deduction for Personal Vehicles

Under previous law, individuals couldn’t deduct interest on personal car loans. The new law flips the script—beginning in tax year 2025 through 2028, taxpayers can deduct interest on loans for personal-use vehicles, provided several criteria are met.

Who Qualifies?

To claim the deduction, taxpayers must meet the following criteria:

Purchase Date: Vehicle loans must originate from purchases made after December 31, 2024.
Vehicle Type: Must be new (not used), U.S.-assembled, and secured by a lien.
Eligible Vehicles: Includes standard passenger vehicles like cars, vans, minivans, SUVs, pickups, and motorcycles—each with a gross vehicle weight rating under 14,000 pounds.
Personal Use Only: Business or commercial vehicles do not qualify.

The deduction is capped at $10,000 per year, and phases out for taxpayers with:

Modified Adjusted Gross Income (MAGI) over $100,000 (single) or $200,000 (joint).

What This Means for Taxpayers

This new deduction is a welcome change for many taxpayers looking to ease the financial burden of a new car purchase. Because it is above-the-line, it directly reduces Adjusted Gross Income (AGI)—potentially lowering your tax bill and helping you qualify for other AGI-sensitive tax benefits.

Example: A taxpayer with a qualifying loan who pays $7,000 in interest during the year could deduct the full $7,000 from their taxable income, assuming they remain under the MAGI threshold

Tax Planning Tips from CPAs in Minneapolis & St. Cloud

Froehling Anderson’s experienced CPAs recommend the following planning steps:

Time your purchase: Make sure the loan originates on a new car purchased after 2024 to qualify.
Check the VIN: Use the NHTSA VIN Decoder to confirm U.S. final assembly.
Keep your records: Retain proof of loan origin, vehicle eligibility, and lien documentation.
Know your limits: If your income is near the phase-out threshold, consult a tax professional before you buy.

Compliance Requirements

Starting in 2025, lenders will need to file information returns with the IRS and provide borrowers with annual statements. Taxpayers must also report their Vehicle Identification Number (VIN) on their return and maintain loan documentation.

The IRS has indicated that transition relief will be available in 2025 to help lenders comply with these reporting requirements.

Areas to Watch

Although the provision offers exciting new benefits, clarity is still needed—particularly when it comes to verifying final vehicle assembly. Additional guidance from the IRS is expected before the 2025 filing season.

Why Work with Froehling Anderson?

Navigating new tax laws can be complex, but you don’t have to do it alone. We are keeping a close eye on these new tax provisions and are here to help you with what lies ahead.

Whether you’re in Minneapolis or St. Cloud, our CPAs are ready to help you understand how the car loan interest deduction fits into your broader tax strategy, and to help you make smart financial decisions that can maximize your deductions.

Need Help with Tax Planning? Contact Froehling Anderson Today.

Let us guide you through the new rules so you can get the most out of your next vehicle purchase. Connect with Froehling Anderson—your trusted advisors.