Vehicle Loan Interest Deduction for New Personal Vehicles (2025–2028)

Recent federal tax law created a temporary deduction for interest paid on loans used to purchase certain new personal vehicles. The deduction applies to vehicles acquired between January 1, 2025, and December 31, 2028, and is available to both itemizing and non-itemizing taxpayers. Because the rules are specific and documentation-driven, a clear understanding of the eligibility and reporting requirements is necessary to properly claim the deduction.

Overview of the Deduction

The provision allows taxpayers to deduct interest paid on a loan used to purchase a qualifying new personal vehicle. The deduction is capped annually and subject to income-based phaseouts. Importantly, this deduction is available regardless of whether the taxpayer itemizes deductions, making it accessible to a broader group of filers.

Qualifying Vehicle Requirements

To be eligible, the vehicle must meet all of the following conditions:

Vehicles used primarily for business purposes do not qualify under this provision, and mixed-use vehicles may require careful allocation analysis.

Final Assembly Verification

Final assembly in the United States is a strict requirement. Taxpayers can verify compliance using one of the following methods:

1. Manufacturer’s information label at the dealership

2. Vehicle Identification Number (VIN)

3. National Highway Traffic Safety Administration (NHTSA) VIN database

The VIN must be reported on the tax return for each year the deduction is claimed.

Deduction Limits and Income Phaseouts

The deduction is subject to a maximum annual limit and phases out at higher income levels, as shown below:

Taxpayers with MAGI above these thresholds may receive a reduced deduction or none at all, depending on income levels. The deduction applies only to interest, not principal payments.

Eligible Interest and Refinancing Rules

Only interest paid on a loan directly associated with the purchase of a qualifying vehicle is deductible. If the original loan is later refinanced, interest paid on the refinanced balance is generally eligible, provided the refinancing does not exceed the remaining principal of the original qualifying loan.

Key technical considerations include:

1. Interest must be paid during the tax year in which the deduction is claimed

2. Prepaid interest may require allocation

3. Refinanced interest eligibility applies only to the qualifying portion of the loan

Compliance and Documentation Requirements

From a compliance perspective, taxpayers should maintain the following records:

1. Vehicle purchase agreement

2. Loan or financing documents showing interest paid

3. VIN and final assembly verification

4. Annual interest statements from the lender

Failure to include the VIN on the tax return may result in denial of the deduction.

Planning Considerations for Tax Professionals

This deduction presents a meaningful planning opportunity, particularly for clients considering vehicle purchases within the applicable years. Timing of purchase, financing structure, and income projections should all be evaluated. For clients near the phaseout thresholds, advance planning may help preserve partial eligibility.

Observations

The vehicle loan interest deduction for 2025–2028 introduces a narrowly defined but potentially valuable tax benefit. Proper application requires careful attention to vehicle eligibility, income limits, documentation, and reporting requirements. Tax professionals should review client vehicle purchases proactively to ensure compliance and accurate tax reporting under this provision.

For full statutory language and updates, practitioners should reference the One, Big, Beautiful Bill provisions available on IRS.gov.

Need Help Applying This Deduction?

Vehicle loan interest deductions involve specific eligibility rules, income limits, and reporting requirements. If you’ve purchased a new vehicle or are planning to do so, working with a qualified CPA can help ensure the deduction is claimed correctly and fully supported. Anu Agrawal, CPA provides personalized tax planning and compliance services to help individuals and businesses navigate complex tax provisions with confidence.

Call 937-707-0712 or email assistant@anucpa.com to schedule a consultation.