Update on 2025 Tax Law Changes
In our July 10, 2025, Blog posting, we wrote about the new tax law changes for 2025 and beyond. One of the topics that was highlighted was the deduction for auto loan interest. As new information becomes available, we want to share it with you.
Ever since the Tax Reform Act of 1986, taxpayers have been unable to deduct personal interest as an expense, including interest paid on auto loans. This all changes in 2025.
Effective for tax years 2025 through 2028, the deduction is limited to the lesser of qualified interest paid or $10,000 annually. To qualify for the deduction:
- The interest must be paid on a loan that is originated after December 31, 2024.
- Purchase a new vehicle (used vehicles do not qualify).
- Vehicle must be for personal use (not for business or commercial use)
- Secured by a lien on the vehicle.
If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction according to IRS FS 2025-03. Interest paid to related parties does not qualify for the new deduction.
The deduction phases out beginning at $100,000 AGI for single filers ($200,000 for joint) at a rate of $200 for each $1,000 of AGI above the threshold. AGI needs to be increased by any foreign income exclusion taken.
A qualified vehicle is a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds that has undergone final assembly in the United States. Note that this rule eliminates the deduction for campers, trailers, and motor homes. The deduction is available for both itemizing and non-itemizing taxpayers. The taxpayer must include the Vehicle Identification Number (VIN) of the qualified vehicle on the tax return for any year in which the deduction is claimed.
Used or salvage-title vehicles, leased vehicles, and vehicles purchased for resale, parts, or scrap do not qualify.
The IRS is expected to create a resource listing qualifying vehicles and models, similar to existing resources for electric vehicle tax credits, to clarify which vehicles meet the final assembly requirement, and several popular imports will not qualify. We assume that the IRS will release a new tax form to report interest and provide VIN information. However, several popular imports are not expected to.
