All about the new car interest loan deduction

Buying a car for Christmas is something we see in the movies and in commercials all throughout the gift-buying season. Some folks might be tempted this year by the new IRS “car loan interest deduction.”

If you are thinking about trying to take advantage of this, you need to be careful, because not every car purchase will qualify, and it is possible that not every car dealer will be able to give you the correct details about which cars qualify and which cars don’t.

Additionally, you don’t want to get into a high-interest car loan on a car that won’t qualify for the deduction!

So here are the basics:

• The car needs to be brand new.  Used cars don’t qualify!
• The car needs to have been purchased starting in 2025.  Cars bought in 2024 or before don’t qualify!
• The car needs to be purchases for personal use.  If you buy the car for your business, it won’t qualify!
• The car needs to be assembled in the U.S.A.  If the car was built overseas, it won’t qualify! (Some foreign brand cars are actually assembled in the U.S.A., but you need to check the Vehicle Identification Number (VIN) before you buy the car to make sure!)

There is a maximum of $10,000 car loan interest per year that can be deducted, and the interest needs to be on a loan that was used to purchase the car and that is secured by a lien on the vehicle. If you get a car with 0% financing, that is a great deal, but there will be no “car loan interest deduction” to take. The deduction starts to phase out for couples making over $200,000 and for individuals making over $100,000. This deduction can also be used for motorcycles, pick-up trucks, SUV’s, vans, and minivans if all of the above conditions are met.

Remember, this “car loan interest deduction” is only good for 2025 through 2028. That’s 4 years, so if your loan repayment plan lasts more than 4 years, you should plan on not being able to take the deduction starting in 2029.

Unfortunately, car loans can have really high interest rates, especially for people who don’t have great credit. So don’t get trapped in a high-interest car loan thinking that you can afford it because of the “car loan interest deduction” if the car you are buying is not going to qualify.

If you have questions about the new tax law, or if the IRS doesn’t let you claim it when you file your 2025 tax return next year, contact us to see if we can help! Call our intake at 215-981-3800, Monday through Thursday, 9:30 to 12:00 or online at philalegal.org/apply.