Car Loan Interest

One of the changes brought about in the relatively recent tax bill is that, subject to various limiting rules, interest expense on the purchase of a car is deductible. Not surprising with virtually any tax matter, there are rules, limitations and other restrictions on how this works. The following are the key issues that are relevant to the ability to deduct the interest expense on a car loan.

•  The loan must be on a new car —loans on used cars are not eligible for this deduction

• The car must have had its final assembly in the US—the manufacturer will provide confirmation of that eligibility when applicable

• This deduction exists for the years 2025 through 2028

• You need not itemize to be eligible to take this deduction

• The loan must have been entered into after December 31, 2024

• The deduction is limited to $10,000

• The amount of the deductible interest is phased out as your income exceeds $200,000 (joint) or $100,000 (single)

• Only passenger cars, including SUVs are eligible for this loan interest deduction

• The car must be for personal use, not for business use. This provision seems almost nonsensical in that if it's for business use, the interest would be deductible as a business expense

• The loan on the car must actually be a lien on the car

• The loan must be with an unrelated party —not with a relative

• Leased cars are not eligible for this interest deduction

As you can see, there are a number of limiting provisions and restrictions. Perhaps the greatest limitation and restriction is that the final assembly must be in the United States. It is impossible to say at this time, but it would not be surprising, based on how Congress handles these things, for this deduction to be extended past 2028. If that happens, it will probably happen sometime in the middle of 2029.