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NEW AUTO LOAN INTEREST TAX DEDUCTION

  • Writer: Treavor Dodsworth CFP®, CPA, CKA®
    Treavor Dodsworth CFP®, CPA, CKA®
  • Aug 28, 2025
  • 2 min read

The auto loan interest deduction allows a qualifying taxpayer to deduct up to $10,000 of auto loan interest from their return. This sounds great but there are several items to be aware of:

Time Horizon

  1. This is a deduction not a credit. Given the income limits (starts phasing out once you hit $200K of modified adjusted gross income for married filing joint or $100K if single). This means that the taxpayer is likely in the 22% bracket or lower.

  2. This is for new vehicles only not used purchases.

  3. It is a temporary deduction (only lasts through tax year 2028).

  4. There are several requirements for the vehicle itself to qualify. For example, the final assembly must be in the United States.


So let's walk through an example. You are considering buying a used $30,000 minivan with low mileage. The salesman says but you could buy this new minivan for $45,000 and save on your taxes.


Let's assume you went against conventional wisdom and took out an auto loan for $40,000. Assuming the vehicle qualifies and you qualify as a taxpayer, you will save roughly $40,000 * 8% (assumed auto loan interest) * 22% (assumed tax bracket)  = roughly $700 a year until the tax deduction phases out.


Are the tax savings worth the additional cost of the new vehicle? No. Should this tax deduction impact your car buying decision? In almost all cases, no. Buying solely to get the tax deduction would not be advisable.


Also, this individual would have an $800/mth payment and pay roughly $8,600 in interest over the life of the loan (if 5yr). The introduction of this tax deduction does not change my encouragement to only buy vehicles you can afford to purchase with cash.

 
 

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