Car Loan Tax Deduction: Take Full Advantage of What’s Allowed

A groundbreaking provision in the "One Big Beautiful Bill Act" (signed July 4, 2025) now allows many car buyers to deduct up to $10,000 per year in auto loan interest, regardless of itemizing, for loans on new, U.S.-assembled vehicles purchased between 2025 and 2028. This above-the-line car loan tax deduction applies even if you take the standard deduction. The move is aimed at supporting Made-in-America vehicles and giving buyers modest tax relief despite rising auto prices under recent tariffs.

It's a bold attempt to reshape both consumer behavior and the domestic auto market. Lawmakers behind the bill hope that putting money back into drivers' pockets will also steer more buyers toward American-made vehicles, bolstering local manufacturing and job growth. It's not just about the numbers on your tax return. It's about shifting momentum toward a more resilient, self-reliant auto industry in a changing global economy.

Made-in-America Car Loan Tax Deduction

The law is deliberately designed to give a clear edge to vehicles assembled right here in the United States. To be eligible for these incentives, a vehicle must undergo its final assembly on American soil, a detail you can verify by checking the information label or using a VIN decoder tool. That means even if a car is made by a foreign automaker, it won't make the cut unless it's actually built in the U.S. It's a patriotic nudge, encouraging buyers to support domestic manufacturing and keep jobs at home.

This requirement plays a major role in shaping buyer decisions, especially for those hoping to take advantage of valuable tax credits and rebates. Automakers are taking note, with several expanding or relocating their production lines to meet these domestic assembly rules. It's not just about compliance. It's about staying competitive in a shifting automotive landscape. For buyers, it adds an extra layer of confidence knowing their purchase helps fuel the local economy.

The One Big Beautiful Bill (OBBB)

This sweeping, 940-page tax-and-spending package became law on July 4, 2025. Among its provisions is a new car loan tax deduction allowing taxpayers to deduct paid vehicle loan interest, up to $10,000 annually, for qualifying cars, SUVs, pickups, vans, and motorcycles with a gross vehicle weight under 14,000 lbs, purchased for personal use from 2025 through 2028. It applies even if you don't itemize and is intended to offset part of the increased cost of U.S.-assembled vehicles due to tariffs.

Who's Eligible For the OBBB Car Loan Tax Deduction?

Individuals with MAGI at or below $100,000 (single) or $200,000 (joint) qualify for the full deduction. Above those thresholds, the deductible amount phases out by $200 for each $1,000 of MAGI until fully phased out at $150,000 for single filers or $250,000 for joint filers.

The car loan tax deduction is available even if you claim the standard deduction as it's considered "above the line." Lease interest, commercial or fleet purchases, and used vehicles do not qualify. Refinanced loans may still qualify, as long as the original vehicle met criteria and the refinanced interest is on the same vehicle lien.

How Much Can This Deduction Save You?

Annual savings vary based on interest paid, tax rate, and usage. On a $44,000 loan at approximately 9.3% interest, you'd pay around $4,100 in interest the first year. If you deduct $4,100, a 24% tax bracket yields a $984 reduction in federal taxes, but limited to $10,000 max. Many buyers with average loans in the $40k-$50k range and average interest rates of 6-9% may save between $400 and $800 per year.

Over four years, that could add up to $1,600 to $2,200. These savings may not completely offset the cost of ownership, but they can ease the financial burden and improve long-term affordability. For buyers comparing financing options, factoring in tax savings can help clarify the true cost of a loan.

Which Chevy Vehicles Qualify?

To qualify, Chevy models must be final-assembled in the U.S., not just sold by a U.S. company. According to Cox Automotive data, only about 44% of Chevrolets sold in 2024 were assembled in the U.S.; certain models qualify, others don't. Examples likely to qualify include Chevrolet Silverado trucks assembled in Michigan or Texas, and some Chevy SUVs or crossovers assembled in U.S. plants such as the Equinox or Traverse.

To be certain, check the Monroney label on the vehicle for "Final assembly USA" or decode the vehicle's VIN using NHTSA tools. Dealers may also provide guidance, but confirmation through the sticker or VIN is critical for tax eligibility.

Key Questions to Ask When Shopping

When evaluating Chevy vehicles and financing deals, be sure to ask:

• Is the vehicle assembled in the U.S.? Ask to see the Monroney sticker or check the VIN.
• Is the loan started after December 31, 2024? Only loans originated in 2025-2028 qualify.
• Is this vehicle for personal use (not fleet or commercial)?
• Will this loan be refinanced later? Confirm that refinances remain eligible under IRS rules.
• How much interest do I expect to pay? Estimate whether annual interest will exceed $10,000 (unlikely for most but worth calculating).
• Do I fall within income limits? If your MAGI will exceed the phase-out thresholds, the car loan tax deduction may be reduced or unavailable.

How to Claim the Car Loan Interest Tax Deduction

When filing your 2025 through 2028 tax returns, claim the deduction above the line, meaning you don't need to itemize. You'll need to include the VIN on your return so the IRS can confirm the vehicle was U.S.-assembled. Expect lenders to issue a Form 6050-AA reporting total interest paid, which you should receive by January 31 each year.

If you refinance, only interest paid on the portion that still qualifies (same vehicle lien) counts; retain documentation for both the old and new loans. State income tax may also be reduced, since the deduction lowers your federal AGI, which is the starting point for many states' tax calculations.

Advantages of Claiming the OBBB Car Loan Tax Deduction

The benefit applies whether you itemize your deductions or stick with the standard deduction, so it's accessible to a wide range of taxpayers. It's also a clear win for American workers and manufacturers, since the car loan tax deduction is reserved exclusively for vehicles assembled in the U.S. That focus on domestic production helps bolster local economies and create jobs, all while rewarding buyers for supporting American-made.

Plus, there's the added perk of a potential break on your state taxes, since the deduction lowers your federal adjusted gross income (AGI). It's a smart financial move that could add up to real savings. The law also gives a subtle push toward financing your vehicle instead of leasing or paying cash, which in turn may open the door for more people to qualify. Altogether, it's a thoughtfully crafted incentive that blends economic policy with everyday consumer benefits.

Car Loan Tax Deduction FAQs

Here are answers to common questions to help you understand how the deduction works and whether it really applies to your situation.

Which Loan Types Are Covered?

Only standard, secured auto loans taken out after December 31, 2024, for new personal vehicles qualify. Lease financing, used vehicle loans, and commercial or fleet loans do not qualify. Refinanced loans can qualify if the original vehicle met the criteria and the lien stays on the same car. Keep all documentation and lien records in case of audit.

Can I Refinance Later?

Yes. If you refinance a qualifying vehicle loan and it remains secured by the same vehicle lien, interest paid on the refinanced loan still qualifies, subject to the $10,000 cap and income phase-out limits.

What Is the Maximum Annual Deduction?

$10,000 per tax year is the maximum deductible interest, regardless of whether you paid more. If multiple vehicles or loans are involved, the combined total interest still cannot exceed $10,000.

Does My Income Influence My Eligibility?

Phase outs begin at $100,000 MAGI for singles and $200,000 for joint filers. Each $1,000 above those thresholds reduces your deductible limit by $200. Full phase-out occurs at $150,000 single / $250,000 joint MAGI. Note: some reporting sources differ slightly on phase-out end, but IRS guidance confirms the higher limits.

Can I Combine It with the EV Tax Credit?

Potentially, but the OBBB bill ends the traditional $7,500 federal EV tax credit after September 30, 2025. Some qualifying U.S.-assembled EVs may still benefit from the auto loan interest deduction, but the EV purchase credit is not available beyond that date. You cannot claim both in the same year unless you qualify under different rules and timing, so check IRS updates for specifics.

Speak to a Financing Expert Today

This new car loan tax deduction comes with layers of complexity, and eligibility depends on where the vehicle was assembled, when the loan was secured, your income level, and the type of financing used.

A significant number of buyers could enjoy annual savings ranging from several hundred dollars up to nearly a thousand dollars. Lower-income buyers, along with those purchasing used or foreign-assembled vehicles can still take advantage of the program.  For this reason, it's important to review eligibility carefully before factoring potential savings into your purchase decision. Contact our team at Colonial Chevrolet in New London, CT, to learn more.