Car Loan Tax Deduction: Who's Eligible and What It Covers
Join us as we dive into some detail explaining what the new Car Loan Tax Deduction on US-built vehicles is all about for the American car-buying public.
Perhaps not all of us have really taken note of what President Trump has introduced in the way of this new act, so we attempt to make "Car Loan Tax Deduction: Who's Eligible and What It Covers" just that much easier to understand, and how it affects car shoppers.
Made-in-America Car Loan Tax Deduction
The newly elected President, Mr. Trump, built his election campaign on the slogan "Make America Great Again," which struck a chord with the majority of Americans. But Mr. Trump's re-election did allow him to bring in some sweeping changes, particularly in tariffs on imported goods, including vehicles.
New vehicle buyers will be pleased to know that buying American now comes with rewards, and buying fully imported vehicles now unfortunately comes with increased price tags, thanks to the new tariffs.
Unlike a tax credit, which directly reduces your tax bill, this new Car Loan Tax Deduction reduces your taxable income amount with the potential to lower the amount of tax you owe.
This initiative is geared towards providing middle-class tax relief and making new car ownership more affordable by rewarding those car shoppers who happen to buy an eligible new vehicle whose final assembly takes place in the USA.
So, for tax-paying American car shoppers, there is now a great incentive to choose a new vehicle that is assembled in America to take advantage of the deduction on the annual interest paid on their car loan.
The One Big Beautiful Bill (OBBB)
The new One Big Beautiful Bill Act was signed into law on July 4, 2025, and as Public Law, it now has a significant effect on federal taxes, credits, and tax deductions.
This new OBBB, amongst many new acts, provides for a possible deduction on the interest paid on new vehicle financing loans.
Eligibility for the OBBB Car Loan Tax Deduction
The new OBBB includes many new tax provisions, of which the new temporary income tax deduction for interest paid on vehicle financing loans for the purchase of qualified passenger vehicles is the subject of our article.
This provision does provide limits to the type of vehicles and who may qualify for any deduction. It also provides limits on the value of any possible deduction within each eligible tax year.
It may sound like a lot to comprehend, but by sticking to the important bits, it quickly makes sense:
- The tax deduction provision will only be in effect for vehicle purchases made in 2025, 2026, 2027, and 2028.
- The tax deduction only applies to personal use vehicles, not fleet owners, commercial vehicles, or lease benefits.
- The tax break only applies to the purchase of new cars, motorcycles, sport utility vehicles, minivans, vans, and pickup trucks that weigh less than 14,000 pounds.
- The vehicle will only qualify for the loan interest deduction if its "final assembly" was made in the United States.
Your finance provider is obligated by law to provide any new vehicle purchaser and the IRS with the correct tax reporting form that provides necessary details about the loan, as well as the purchased vehicle that secures the loan, including your new vehicle's identification number.
Lastly, a car loan may not originate from friends or family or any suspect loan sharks.
Potential Savings from Claiming
Buyers can look forward to a possible tax break with an annual deduction of up to $10,000 of the loan interest on the purchase of any eligible vehicle, as shared above, for the tax years 2025, 2026, 2027, and 2028.
As more tax professionals and finance gurus get their heads around these new provisions, the precise amounts may be difficult to nail down due to varying individual tax rates and loan interest rates.
The IRS will be issuing further rules and interpretations down the line, which may provide additional clarity on eligibility, documentation, and claiming procedures.
For now, we can share that car shoppers purchasing a pricier vehicle with a maximum price tag of about $112,000 will be eligible for the maximum $10,000 interest tax deduction in their first year of ownership.
Buyers will need to be aware that with the new law, their vehicle loan tax deduction will diminish for taxpayers with a modified adjusted gross income above the $100,000 threshold. The Act also provides for the deduction amount to be reduced by $200 for every $1,000 of income received above the threshold.
High earners will also need to take note that no tax deduction is available for single tax filers earning above $150,000 and for married couples with incomes that exceed $250,000.
Which Mazda Vehicles are Eligible?
We all know that Mazda is a Japanese brand. However, not all their vehicles sold in the USA are built in Japan.
Currently, the sole Mazda model that goes through final assembly in the USA is the CX-50 lineup, which is eligible for the new Federal Car Loan Interest Tax Deduction.
Shoppers will need to be aware that any potential deduction is VIN-specific, and not all vehicles of the same model may qualify for the loan interest deduction.
Questions to Ask Us When Shopping
New vehicle buyers with a new Mazda on their shopping list should be asking the right questions of the sales personnel at the dealership to benefit from the savings potential of various models.
Be sure to trust Mazda's authorized dealers to have their teams up to speed on all that the new act means when buying a new Mazda.
Shoppers need only ask us whether the Mazda model they have in their sights is assembled in the USA.
Steps to Claim Your Car Loan Interest Deduction
Let's look at the steps required to claim your Car Loan Interest Deduction.
Remember, this new car loan interest tax deduction can only be claimed for the tax years 2025 to 2028 and on the purchase of any new eligible US final assembled vehicle.
Taxpayers will need to file their tax returns with the Internal Revenue Service (IRS) and with the state or local tax collection agency. Mazda buyers will typically require the use of Form 1040 or Form 1040-SR when filing their federal income taxes in order to claim their car loan interest tax deduction.
Taxpayers should be aware of the following provisions:
- Any deduction phases out for taxpayers with a modified adjusted gross income of over $100,000 or $200,000 for joint filers.
- To qualify for any tax deduction, the interest must be paid on a new personal car purchase finance loan that originated after December 31, 2024.
- If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount will also generally be eligible for the deduction.
It is always advisable to consult with your tax, legal, or accounting professional for further detailed information and advice. As previously mentioned, the IRS will be issuing further rules and interpretations as time goes on, which may provide additional clarity on eligibility, documentation, and claiming procedures.
Benefits of Claiming the OBBB Car Loan Tax Deduction
Why claim? Reducing your taxable income means paying less tax. It's that simple.
New car buyers now have the potential to be rewarded with reduced taxes being paid just by buying their new personal use vehicle that happens to be assembled in America.
A quick bit of research on potential savings reveals that the average new vehicle loan is around $44,000 financed over six years. Interest rates will vary by buyer, along with the savings.
The tax deduction will decline after the initial year, because interest payments on loans are typically frontloaded, so at a 9.3% interest rate, an average new vehicle buyer has the potential to save about $2,200 on taxes over four years, and obviously, less savings on a lower interest rate.
Car Loan Tax Deduction FAQs
There is a lot to digest with the new act, so let's assist by providing answers to some frequently asked questions about the new Car Loan Tax Deduction.
Which Loan Types Are Eligible?
All new car loans as of December 31, 2024, for the purchase of any eligible vehicle that is assembled in the USA are eligible for the car loan tax deduction.
Can I Refinance Later?
Yes, any interest paid on the refinanced amount on a qualifying vehicle loan can be eligible for the car loan tax deduction.
What Is the Maximum Deduction per Year?
The Act allows for an annual tax write-off of up to $10,000 of interest.
Does Income Influence Eligibility?
Yes, your personal income does affect eligibility as per our shared criteria.
We advise car buyers to consult their own tax, legal, or accounting professional if they have further questions.
Does the EV Tax Credit Also Apply?
Yes, but this falls away on September 30, 2025, but the Car Loan Interest Tax Deduction will still be applicable.
Speak to a Financing Expert Today
At Central Mazda in Plainfield, CT, our professional team can offer you personalized support and financial guidance when it comes to financing your new Mazda, along with helping you get the best benefits from the available car loan tax deduction. Contact us today to get started.
