Can You Deduct Auto Loan Interest in 2025? Here’s What You Need to Know

If you’re making payments on a car loan, you may be wondering if the interest is tax-deductible — especially with new tax policy updates making headlines. Under normal circumstances, interest on a personal car loan isn’t deductible. But a new policy introduced by Donald Trump could change that for some taxpayers. The proposal, part of his 2025 tax plan, would allow individuals to deduct interest paid on loans for vehicles assembled in the U.S. This deduction would be available only to those who itemize their deductions and would be capped at $10,000 per year. However, the benefit phases out for individuals earning more than $100,000 ($200,000 for married couples). It’s also a temporary measure, set to last from 2025 to 2028. While this sounds like a great perk for car buyers, not everyone will qualify — and the biggest benefits may go to higher-income individuals who already itemize. At the same time, if you’re self-employed or use your vehicle for business, the existing tax rules under the 2017 Tax Cuts and Jobs Act (TCJA) still allow you to deduct auto loan interest based on your business usage. The bottom line? Whether you’re a business owner, contractor, or everyday car buyer, it’s important to understand which rules apply to your situation — and how to take advantage of them.

10 Things to Know About the Auto Loan Interest Deduction in 2025

1. It applies only to U.S.-assembled vehicles.
   To qualify for the new deduction, the car must be assembled in the United States. Foreign-made vehicles won’t be eligible, even if purchased in the U.S.

2. You must itemize your deductions.
   This benefit is only available if you itemize your deductions on your tax return. If you take the standard deduction (as most people do), you won’t be able to claim it.

3. There’s a $10,000 annual cap on the deduction.
   You can deduct up to $10,000 in auto loan interest per year, which can make a difference if you’ve financed a new or higher-priced vehicle.

4. High earners may be phased out.
   The deduction begins to phase out at $100,000 of income for single filers and $200,000 for joint filers, meaning higher-income taxpayers may get only a partial benefit — or none at all.

5. The deduction is temporary.
   This policy only applies to tax years 2025 through 2028. Unless Congress renews or extends it, it will disappear after that.

6. Self-employed people still benefit under existing rules.
   If you use your vehicle for business, you can already deduct part of your loan interest based on how much of your driving is for work. This is separate from the new policy and remains in effect under the TCJA.

7. Business and personal use must be clearly separated.
   If your car is used for both personal and business purposes, you must track your mileage and usage carefully to determine what portion is deductible.

8. Used vehicles qualify — if they’re assembled in the U.S.
   The vehicle doesn’t have to be brand new. Used cars that meet the U.S. assembly requirement are also eligible.

9. Employees still can’t deduct unreimbursed expenses.
   W-2 employees cannot deduct job-related driving expenses or loan interest unless their employer reimburses them. This rule hasn’t changed since 2018.

10. Proper documentation is essential.
    To claim either the new deduction or the existing business-use deduction, keep detailed records — including your loan documents, vehicle origin, and mileage logs — in case the IRS asks for proof.

Need help figuring out how these deductions apply to your tax situation?
We’re here to walk you through it. At Barbee Tax Consulting, we’ll help you make the most of every deduction you’re entitled to — and avoid costly mistakes. Call us today at (708) 405-2112, we’re ready to help.