Video: One Big Beautiful Bill: New Car Loan Interest Deduction (Part 4)
Learn how the One Big Beautiful Bill, also known as the Working Families Tax Cut adds a new car-loan interest deduction starting in 2025. In this video, we cover the $10,000 annual limit, income thresholds and phaseouts, qualifying vehicle and loan rules, and the steps to claim this new tax break.
The One Big Beautiful Bill that passed includes permanently extending tax cuts from the Tax Cuts and Jobs Act, including increasing the cap on the amount of state and local or sales tax and property tax (SALT) that you can deduct, makes cuts to energy credits passed under the Inflation Reduction Act, makes changes to taxes on tips and overtime for certain workers, reforms Medicaid, increases the Debt ceiling, and reforms Pell Grants and student loans. Updates to this article are in process. Check our One Big Beautiful Bill article for more information.
Video Transcript:
Did you know you can deduct interest on certain car loans?
We'll explain how this new benefit works, who qualifies, and how much you can deduct.
Under the One Big Beautiful Bill, also known as the Working Families Tax Cut, the new car loan interest deduction allows eligible taxpayers to deduct up to $10,000 in interest paid
on a qualifying auto loan for tax years 2025 through 2028.
So what type of car loan for interest deduction? To qualify, the car and loan must meet various qualifications.
In most cases, you can claim the deduction if:
One: the vehicle is a new car, minivan, van, SUV, pickup truck, or motorcycle. Used vehicles, even if new to you, are not eligible.
Two: The car’s final assembly occurred in the United States, and it weighs less than 14,000 pounds.
Three: the car is for personal use.
Four: The loan is secured by the qualifying vehicle and used to purchase it. Leases and unsecured loans do not qualify.
And five: The loan was issued after December 31st, 2024. If a qualifying loan is later refinanced, interest on the refinanced amount is generally still eligible.
But how do you claim the interest deduction? For your 2025 return, gather your loan paperwork or ask your lender for a statement showing total interest paid. In future tax years, lenders will send a form probably similar to 1098, showing how much car loan interest you paid.
When you file, you’ll enter your car’s VIN and interest amount on Schedule 1-A, Part four.
Then, you'll submit Schedule 1-A along with your tax return to the IRS. It's a below the line deduction, so you can claim it even if you don't itemize.
Your modified gross income, or MAGI, can limit how much you can deduct. The full $10,000 may be deducted if your MAGI is $100,000 or less, or $200,000 or less if married filing jointly.
If your MAGI is above those amounts, your allowed deduction drops $200 for every $1,000 over the limit, until it phases out completely. For example, say you're a single filer with an MAGI of $112,500.
That’s $12,500 over your $100,000 limit.
At $200 for every $1,000 over the limit, rounded up, that works out to $2,600 off your deduction, assuming you paid at least $10,000 in interest, your maximum deduction is $10,000 minus $2,600, which equals $7,400.
Understanding how these changes affect you, doesn't have to be stressful. Filers could see up to $1,000 refund increase or lower balance due, based on recent tax law changes.
Watch the rest of the videos in this series for a deep dive into each change, so you'll know exactly what to expect when you file.
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