🚗 Auto Loan Interest Is (Partially) Deductible Again — Thanks to the Big Beautiful Bill

alison882
Jul 13
2 min read

Here’s what you need to know about the new auto loan interest deduction and how it might impact your tax strategy.

For years, taxpayers have asked the same question:“Can I deduct my car loan interest?”

Until recently, the answer was almost always no—unless the vehicle was used for business purposes. But with the passage of the Big Beautiful Bill (BBB), that answer is changing.

The new legislation introduces a limited but meaningful opportunity for some taxpayers to deduct a portion of their personal auto loan interest—a shift that hasn’t been seen since the 1980s.

Let’s break down what’s changing, who qualifies, and how to take advantage of the new rule.

🧾 What Changed in the BBB?

Under the previous law, auto loan interest was only deductible if the vehicle was:

Used exclusively or primarily for business, and
Deducted via business expenses (Schedule C or Form 2106).

The Big Beautiful Bill adds a new deduction category:✅ Limited deduction for personal auto loan interest, capped annually.

Starting in tax year 2025, eligible taxpayers can deduct up to $10,000 of interest paid on non-business personal auto loans, subject to income limits and certain vehicle criteria.

✅ Who Qualifies for the Deduction?

This deduction is available to:

Individuals with adjusted gross income (AGI) under a certain threshold (e.g., $120,000 single / $240,000 MFJ),
Loans originated after January 1, 2025, for new vehicles, and
Cars must be assembled in the United States

The deduction begins to phase out above the AGI thresholds, and second vehicles may have limited eligibility depending on household income and use.

⚠️ Key Limits and Considerations

Only interest is deductible — not principal payments.
The deduction is “above-the-line”, meaning you don’t need to itemize to claim it.
Taxpayers cannot double-dip: if you're claiming mileage or actual expenses for business use, you can’t also claim personal interest on that same vehicle.

📊 Example: How Much Could This Save You?

Let’s say you take out a $30,000 loan for a new vehicle in 2025 at 6% interest. In your first year, you might pay about $1,700 in interest.

If you qualify under the BBB rules, you could deduct that full $1,700—reducing your taxable income and potentially lowering your tax bill by $400–600, depending on your bracket.

💡 Planning Tip: Timing Matters

This is a forward-looking change, so:

Loans must be originated after January 1, 2025
Bought before that? No deduction.
If you’re planning to purchase a vehicle soon, it might be worth investigating what type of car would meet the specifications depending on interest rates and your financial situation.

🧠 Final Thoughts

The reintroduction of auto loan interest deductibility—at least in a limited form—is a win for many everyday taxpayers. While it won’t dramatically change your return, it offers a new way to save for those already managing rising vehicle and loan costs.

And in a landscape where every deduction counts, this one could be a meaningful addition to your strategy.