The tax break is designed to make owning a car more affordable
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A new federal tax deduction will allow eligible taxpayers to deduct interest paid on new car loans beginning this tax year.
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Lawmakers say the measure is designed to ease the burden of high auto prices and elevated interest rates.
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Its a top-line deduction, so taxpayers dont have to itemize to benefit.
No tax on tips and no tax on overtime got the most attention when Congress passed The One, Big Beautiful Bill, but theres another deduction in the legislation that could benefit consumers who purchased and financed a new car in 2025.
In a move aimed at easing the financial strain of buying a vehicle, the bill contained a new income tax deduction allowing eligible taxpayers to deduct interest paid on new car loans.
The deduction, which takes effect this tax year, comes as Americans continue to grapple with high vehicle prices and interest rates that have significantly increased monthly car payments.
Supporters say the measure could provide meaningful relief for middle-class households, while skeptics question how broadly the benefit will apply.
How the deduction works
Under the new provision, taxpayers can deduct interest paid on qualified auto loans used to purchase new personal vehicles. The deduction applies only to loans originated after the laws effective date Dec. 31, 2024 and is subject to income limits. The maximum deduction is $10,000.
According to congressional summaries, individuals earning up to a specified income threshold expected to phase out for higher earners will be eligible to deduct up to a capped amount of auto loan interest annually. The deduction can be claimed whether the taxpayer itemizes or takes the standard deduction, a feature lawmakers included to broaden access.
Why lawmakers acted now
The average price of a new vehicle remains significantly higher than it was before the pandemic, and interest rates on auto loans have climbed as the Federal Reserve has worked to combat inflation. Many buyers are now financing vehicles at rates that add thousands of dollars in interest over the life of a loan.
Consumer advocates have pointed out that transportation costs are one of the largest household expenses, particularly in areas without reliable public transit. Higher borrowing costs have pushed monthly payments to record levels for many consumers.
By allowing borrowers to deduct interest paid on their loans, lawmakers hope to soften the blow of elevated rates and make vehicle ownership more affordable.
Who benefits most?
Tax experts say the value of the deduction will vary depending on a taxpayers income, loan size, and interest rate.
For example, a borrower who pays $1,500 in auto loan interest during the year and falls within the eligible income bracket could reduce their taxable income by that amount. The actual tax savings would depend on their marginal tax rate.
Middle-income households are expected to see the greatest benefit. However, analysts caution that lower-income families who may owe little or no federal income tax could see limited gains.
Impact on the auto industry
Auto industry groups have welcomed the change, arguing it could help stimulate demand, particularly as consumers grow cautious about taking on large loans.
Dealers say the deduction could make financing more attractive compared with paying cash, especially if interest rates remain elevated. Some economists believe the measure could modestly boost vehicle sales, though they do not expect it to dramatically alter market conditions.
Posted: 2026-02-18 12:48:09


















