There are several ways to buy a new car, from purchasing one outright with cash to financing it through a car loan. Now, however, a provision in the recently passed One Big Beautiful Bill (OBBB) provides a little tax incentive for anyone thinking of financing a car through 2028.
Find Out: 8 Ways Trump’s ‘One Big Beautiful Bill’ Could Offer Tax Relief
Read Next: Mark Cuban Tells Americans To Stock Up on Consumables as Trump's Tariffs Hit -- Here's What To Buy
“As of 2025, when you buy an automobile for personal, nonbusiness use, not a lease, a loan you borrow for it can be deductible for interest. It hadn’t been deductible for a while, so it’s a significant change,” according to Alex Black, CMO of EpicVIN.
Find out if this tax deduction can make it cheaper for you to finance a new car.
What the Provision Says
Effective immediately (and retroactively through 2025), for any car purchased between 2025 and 2028, you may deduct interest paid on a loan of a “qualified vehicle” so long as the vehicle is for personal use.
A qualified vehicle, according to the IRS page, “is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds.”
This only applies to new vehicles, so used car buyers will have to find other ways to justify their purchases.
Learn More: What Trump’s New Tax Law Means for Upper-Middle-Class Families in 2025
Focus on American Made
For lovers of Japanese, German and other overseas carmakers, there won’t be as much tax incentive for you. Ruth Calkins, auto expert and general manager at Findbyplate, pointed out that “The OBBB limits its tax deductions to American assembled new vehicles alone, and does not include a provision for used vehicles, much less those assembled outside America.”
While there’s a lot of gray area around whether a car has been fully made or assembled in the U.S., you’ll be able to get this answer through your car’s vehicle identification number (VIN).
However, unlike the clean vehicle tax credit that only covers electric vehicles (EVs), the OBBB vehicle loan deduction is more inclusive and accommodating of both internal combustion engine vehicles and EVs, Calkins said. And, since that EV credit is going to be phased out after Sept. 30, 2025, this might be a good way to get a bit of a break.
Be Aware of Income Limitations
While there is a limit on how much interest you can deduct, “as long as the vehicle satisfies the eligibility requirements, the vehicle qualifies for the tax deduction,” Calkins said.
Apart from the loan origination date, Calkins said, “another caveat that buyers should take note of before daydreaming about all the things they could do with this tax break come next taxing season, is the income limitation.”
Additionally, given that the deduction only extends to individual consumers with a modified adjusted gross income (AGI) of $100,000 or less, and $200,000 for those filing jointly, many people will not qualify for this deduction.
Itemizers Only
There’s one more caveat, Black said. “You will have to itemize your deductions in order for you to claim it, something not everyone does anymore since the standard deduction went up.”
So, if you normally take the standard, this may not help you.
What If You Bought a Car This Year Already?
If you already took out a loan on an otherwise qualifying vehicle and you’re wondering if you’re eligible based on purchase date, the key is simple: If you purchased it in 2025, you can still qualify for the deduction. “However, if you are already in a car loan [from 2024 or earlier], sorry — no discount for you,” Black said.
How Much Can You Save?
How much you can save will depend on how much you borrow and your interest rate, Black said. However, it is worth noting that the average person taking advantage of this tax break isn’t going to spend anywhere close to $10,000 in auto loan interest in a year. According to car website Edmunds, you’d have to take out an auto loan of around $112,000, which is more than double the average price of a new vehicle, to even pay that much in annual interest.
Let’s say you did take out a $25,000 loan at 7% interest, Black said “You’ll pay roughly $1,750 in interest in year one. If you’re in the 22% tax bracket, you might get nearly $400 off your tax bill. Not bad.”
Overall Impact on Auto Buyers?
Black suggested the tax credit may make more people choose buying over leasing and it can also soften the blow of rising interest rates a bit.
“It won’t make a significant impact, though, but it could very well decide for price-conscious buyers.”
More From GOBankingRates
- I'm a Realtor: This Is Why No One Wants To See Your Home
- 3 Things Retirees Should Stop Buying To Save Money Amid Tariffs
- How Much Money Is Needed To Be Considered Middle Class in Your State?
- 6 Hybrid Vehicles To Stay Away From in Retirement
This article originally appeared on GOBankingRates.com: Financing a Car? Find Out If This New Tax Deduction Could Lower Your Costs
