New ‘No Tax on Car Loan Interest’ Break Could Save Drivers Hundreds

A new federal tax deduction may help ease the cost of buying a new vehicle — but experts say it should not be the only reason to head to the dealership.

Signed into law in July 2025 as part of President Trump’s “One Big Beautiful Bill,” the new provision allows eligible buyers to deduct up to $10,000 per year in interest paid on certain new car loans.

The goal is to make American-assembled vehicles more affordable for working families and retirees.

Here’s how it works.

When you finance a new car, part of your monthly payment goes toward interest. In the past, that interest was not deductible on personal tax returns. Under the new rule, qualifying buyers can subtract the interest paid during the year from their taxable income.

For example, if you paid $2,000 in interest in 2025, you could reduce your taxable income by $2,000. Depending on your tax bracket, that could mean hundreds of dollars in savings.

The deduction applies even if you claim the standard deduction — you do not have to itemize.

Who qualifies?

To be eligible:

• The vehicle must be new, not used.
• It must be assembled in the United States.
• It must be purchased for personal use, not business.
• The loan must have started after December 31, 2024.
• The purchase must occur between 2025 and 2028.
• Leases do not qualify.

The deduction begins to phase out for individuals earning more than $100,000 in adjusted gross income, or $200,000 for married couples filing jointly.

Eligible vehicles include cars, minivans, vans, SUVs, pickup trucks, and motorcycles with a gross vehicle weight rating under 14,000 pounds — as long as they were assembled in the U.S.

Buyers can check the vehicle information label or review the 17-digit Vehicle Identification Number (VIN). Generally:

• VINs beginning with 1, 4, or 5 indicate U.S. assembly.
• A 2 indicates Canada.
• A 3 indicates Mexico.
• Letters J through R typically indicate Asia.
• Letters S through Z indicate Europe.

Only U.S.-assembled vehicles qualify for the deduction.

Recent buyers can benefit as well. If you purchased a qualifying vehicle in 2025 with a loan issued after December 31, 2024, you can claim the deduction on your 2025 tax return, filed in early 2026. Lenders are expected to send documentation, such as Form 1098, showing the interest paid.

Should you buy a car just for the deduction?

Financial experts urge caution.

While the break could save the average buyer between $300 and $600 per year, it rarely outweighs the overall cost of buying a new vehicle.

For example, financing a $40,000 car at 6 percent for five years could mean roughly $4,800 in interest payments during the early years of the loan. A taxpayer in the 22 percent bracket might save about $1,056 in taxes that year. But the buyer would still pay the full interest, plus the vehicle’s principal, insurance, maintenance, and depreciation — expenses that can total $10,000 or more annually.

In other words, the deduction lowers your tax bill, but it does not erase the cost of borrowing.

Experts say the policy makes the most sense for consumers who already need a new vehicle. In that case, the deduction can reduce the effective cost of financing — a welcome bonus.

But buying a car solely for the tax break may end up costing far more than it saves.