Disclaimer: Do not make tax planning or preparation decisions based on this article. This article is for informational purposes only. The tax code and any guidance the IRS provides should be relied on for tax preparation and planning, as well as a competent tax professional who you have engaged for services. The tax code can and will change and the IRS has not yet published guidance or procedures for this deduction, of July 7, 2025. This article does not cover all the details of this topic. 

 

There is a section of the new tax law in a recent act passed by Congress called “No tax on car loan interest”. I don’t really like the name. What is really in the new law is that car loan interest may be deductible personal interest on an individual return (1040 filing) in SOME cases. I prefer to call this deduction “Qualified Vehicle Loan Interest Deduction (QVLID). I don’t think that will catch on. We’ll see if the IRS comes up with a better name. 

The Good

  1. This deduction IS available for NON-ITEMIZERS, as well as itemizers. So it can be “stacked” onto the standard deduction. 
  2. The maximum deductible is $10,000 for any taxable year. This is higher than what many taxpayers pay in vehicle interest in a year. 
  3. There is direction for new 1099 reporting for this interest. The details on that will be provided by the IRS in the future. 

Limitations

    1. Currently it is only available starting tax year 2025 through tax year 2028. So for 4 years. 
    2. The indebtedness has to occur for purchase of a vehicle after 2024 and be the first lien on an applicable passenger vehicle for personal use.
    3. The original use of the vehicle has to commence with the taxpayer.
    4. There are vehicle loan situations that are not covered. The two most likely for taxpayers is that the loan cannot be for any lease financing and it cannot be for the purchase of a vehicle with a salvage title.
    5. The taxpayer does need to include in the tax filing the vehicle identification number (VIN). 
    6. As already stated max deduction in one year is $10,000. 
    7. There is a phase out. The allowable deduction is reduced by $200 for every $1000 above the modified adjusted gross income (MAGI) of $100,000 except for the case of married filing joint return for which case the phase out starts when $200,000 of income is passed. 
    8. The vehicle has to be for personal use. Perhaps the guidance will be that to use guidance will require 100% personal use. Otherwise, this will likely create complications for mixed use (personal and business) vehicles. Perhaps the guidance will be to handle those in a manner like we allocate other expenses and costs for those situations. 
    9. The law defines what is a vehicle for this purpose. For most cases that won’t be an issue. Although one item of note is that the gross vehicle weight rating has to be less than 14,000 pounds. Also the vehicle  has to be a vehicle manufactured for primary use on public streets, highways, and roads. 
    10. Here is a big one. The final assembly of the vehicle has to be in the United States to be a qualified vehicle. The law does provide guidance on what is ‘final assembly”. Hopefully the IRS will generate a list for us to make it easier for us taxpayers. 
    11. As long as refinancing of the vehicle covers only qualifying original debt for a qualifying vehicle, and is in the first lien position, then the interest on refinancing will qualify for the deduction. Note that if the original purchase was before tax year 2025, it is NOT qualifying. 

New filing requirements:

In addition to a new 1099 requirement for businesses collecting interest from vehicles, quite a bit of information is required on the tax return for this deduction. I expect that there will be an entirely new tax form. Don’t worry, the IRS will let us know once they have it sorted out. 

 

As a tax professional I see that this deduction will be beneficial to many taxpayers, but also many will not benefit from this deduction. I recommend not rushing out to buy a new vehicle to get this deduction, just to get the deduction. But if you are going to buy a vehicle and want to use the deduction I recommend confirming it would really qualify for the deduction before purchase. Waiting for a couple of months for things to settle out would be wise. 

 

As a financial counselor I worry that some individuals will buy vehicles that they shouldn’t be buying because of the incentive of a tax deduction. As I stated some taxpayers won’t benefit from this deduction. Also, a deduction typically only reduces your taxes by a percentage of the deduction amount. You don’t get a dollar for dollar reduction in taxes. 

 

I hope this article helps you and helps to mitigate all the false information that is already out regarding the recent tax law changes.