The 2025 tax year introduces a significant new opportunity for individuals to deduct car loan interest on their federal income tax returns. Here’s a comprehensive summary of the rules, eligibility, and reporting requirements for this deduction.
Eligibility and Key Requirements
For tax years 2025 through 2028, individuals may deduct up to $10,000 per year in interest paid on loans used to purchase new personal-use vehicles. This deduction is available to both itemizers and non-itemizers, as it is taken “above the line” and directly reduces adjusted gross income (AGI).
To qualify:
- The loan must be originated after December 31, 2024, and before January 1, 2029.
- The vehicle must be new, with original use beginning with the taxpayer (used vehicles do not qualify).
- The vehicle must be for personal use, not business or commercial use.
- The vehicle must have a gross vehicle weight rating under 14,000 pounds and must have undergone final assembly in the United States.
- The loan must be secured by a first lien on the vehicle.
- The taxpayer must include the Vehicle Identification Number (VIN) on the tax return for any year the deduction is claimed.
Income Phase-Outs
The deduction is subject to a phase-out for higher-income taxpayers. For single filers, the phase-out begins at modified adjusted gross income (MAGI) over $100,000; for joint filers, it begins at $200,000. The deduction is reduced by $200 for each $1,000 (or portion thereof) by which MAGI exceeds these thresholds.
Mixed Personal and Business Use
If a new vehicle is used for both personal and business purposes, the interest deduction is split:
- The portion attributable to personal use (if the vehicle is used more than 50% for personal purposes) may be claimed as an above-the-line deduction, up to $10,000 (subject to income phase-out limits).
- The business-use portion of interest is deductible as a business expense on the appropriate schedule (e.g., Schedule C, E, or F) and is not eligible for the new above-the-line deduction for personal-use vehicle loan interest.
- The total deduction cannot exceed the interest actually paid.
Reporting Requirements
Lenders who receive $600 or more in interest from an individual in a calendar year must file an information return (Form 1098-VLI) with the IRS and provide a statement to the borrower, including the amount of interest paid and vehicle details. The IRS is allowing transitional relief for 2025, meaning lenders only need to provide alternative statements for interest paid in 2025, with official 1098-VLI reporting to the IRS and borrower starting for 2026 data.
Vehicles That Do Not Qualify
Interest paid on loans for commercial vehicles, fleet sales, leases, salvage title vehicles, or vehicles intended for scrap/parts does not qualify for the deduction.
Conclusion
The 2025 car loan interest deduction offers a valuable tax benefit for individuals purchasing new, U.S.-assembled vehicles for personal use. Taxpayers should ensure they meet all eligibility requirements, track their interest payments, and report the necessary information on their returns to take full advantage of this deduction. For vehicles with mixed personal and business use, careful allocation of interest is required to maximize allowable deductions.
Article Submitted by John J. Moller, CPA
