Taxpayers could hit a dead end with car loan interest deduction

• Find out if your new car or truck was built in the United States. See the window sticker or use a VIN Decoder tool at the National Highway Traffic Safety Administration website.
• Beginning on 2025 tax returns, new car buyers who qualify can take a new deduction of up to $10,000 in car loan interest during a given tax year.

The so-called "no tax on car loan interest" promise has enough dents and dings to leave plenty of car buyers upset when they discover they won't qualify for the much-publicized tax break on their 2025 income tax returns.

Who is being left on the side of the road?

Lower-income households that don't have much cash to buy a more affordable used car — many use their tax refund cash for a down payment — cannot get a federal income tax deduction on interest paid in 2025 for higher-rate used car loans taken out last year.

Yep, used car loans don't count.

And if you lease? Forget it. The new deduction for car loan interest that went into place under the One Big Beautiful Bill Act does not apply to leases, either.

Leasing is a big deal in some states, including Michigan, New Jersey, New York, and California — where a large percentage of new car sales involve leases, not new car loans.

In Michigan, nearly 53% of new vehicles sold in the third quarter of 2025 involved a lease, not a car loan, according to data from Experian. Michigan ranked No. 1 for leasing in that quarter; closely followed by New Jersey at 49.7% and New York at 43.7%.

By contrast, according to Experian, 5% or fewer of new vehicles sold in the third quarter involved a lease in states such as Alaska, Arkansas, Kansas, Oklahoma, West Virginia and Wyoming.

Many times, manufacturers will advertise special lease deals that are available only in Michigan, according to David Lawrence, director of finance and development for the LaFontaine Automotive Group in Highland, which has 45 dealerships in Michigan. He noted that leasing is popular in Michigan in part because so many people work in the auto industry or have family members who do and can qualify for extra discounts.

The No. 1 question to consider when it comes to claiming the car loan interest tax deduction, though, is: Where exactly was your car or truck built?

Many people cannot answer that question on the spot. But do not even bother to try to snag a tax break on car loan interest until you do a little research.

You cannot claim the new tax deduction for car loan interest, if the new car you bought in 2025 had its final assembly outside of the United States.

How to find out where your car was built

If you think you might qualify for the car loan interest deduction, first dig out the window sticker that was on the new car you bought in 2025 — known as the Monroney label, named for Sen. Almer Stilwell “Mike” Monroney. The Oklahoma Democrat pushed for legislation to give consumers detailed upfront information via window stickers in 1958.

The sticker will tell you where the car was built. Don't assume anything. Find the exact location of final assembly for your make and model.

For many consumers, it can be difficult to discern whether a car's final assembly was in the United States, according to the National Automobile Dealers Association. Some Detroit Three vehicles, for example, can have final assembly outside of the United States.

"One model of that trim may be built in Mexico, and the other trim may be built in America. It's sometimes may even be trim-specific," Lawrence said.

That's why you must refer to the Monroney label, he said.

And remember, production can move around, too, from one year to another.

"Manufacturers have been adjusting their manufacturing locations a lot over the past few years," said Patrick Anderson, CEO of the Anderson Economic Group consulting firm in East Lansing.

What many might not realize is that popular brands, such as Toyota and Honda, have assembly plants in the United States. Yet some popular models don't qualify for the new tax break because their final assembly isn't in the United States, including the Toyota Tacoma, the Honda HR-V, the Chevrolet Equinox, the Kia K4 and the Ford Maverick, according to Ivan Drury, director of insights at Edmunds.

Taxpayers who cannot find their vehicle's window sticker can turn to the VIN Decoder tool at the National Highway Traffic Safety Administration website. You plug in the VIN from your vehicle and the model year.

It works well. Look for "plant information" for final assembly.

If the vehicle was assembled in the United States, buyers will need to include the VIN on Schedule 1-A to claim the deduction. See the top of page 2 of Schedule 1-A dubbed "No Tax on Car Loan Interest."

You'd claim the "total additional deductions" from Schedule 1-A, line 38, on your 1040 form, line 13b.

A key point: Someone can claim a deduction for car loan interest even if they opt for the standard deduction, as most people do, or if they itemize other deductions on Schedule A.

How much can you save in taxes from car loan interest?

Beginning on 2025 tax returns, new car buyers can take a new deduction of up to $10,000 in car loan interest during a given tax year. The deduction would reduce your taxable income in a given year, if you qualified.

Most people do not pay anything close to $10,000 in interest a year on a new car loan. How much you save will depend on how much of the interest you paid in 2025 qualifies for the tax deduction and your specific income tax rate.

Typically, those who qualify might see tax savings in a year that could range from around $300 to $900 for many new car buyers, Anderson said.

Car loan interest payments tend to be front-loaded in the first year of the car loan, so you'd likely see the biggest deduction in the first year of the car loan.

The deduction will get lower in future tax years as they pay off the loan over time, Anderson said.

The deduction is only available on tax returns for 2025, 2026, 2027 and 2028 currently. If you took out a six-year, new car loan in 2025, for example, you would not receive a break during the last two years of that car loan.

Remember, the car loan interest deduction only lasts through tax year 2028, which may not necessarily be through the life of your particular car loan.

The deduction only applies for car loans taken out after Dec. 31, 2024, through Dec. 31, 2028.

Several rules apply to car loan interest deduction

While many car buyers will be thrilled to get a tax break on their car loan interest, figuring out who actually qualifies could prove to be excruciatingly painful.

For some, it's not quite as tortuous as trying to rebuild your car's transmission. But it could be close.

Higher income households tend to buy more new cars, but many taxpayers could discover that their incomes are above the income limit required to qualify for the deduction for the interest they paid on new car loans.

The deduction phases out by $200 for each $1,000 — or a fraction of — of modified adjusted gross income above $100,000 for single filers and $200,000 for joint filers.

In simplest terms, the deduction for auto loan interest is no longer available at a modified adjusted gross income of $150,000 for single filers and $250,000 for joint filers.

An example listed by Jackson Hewitt online: A single person with a qualifying auto loan and a modified adjusted gross income of $120,000 would only be eligible to claim up to $6,000 of the car loan interest deduction instead of the maximum of $10,000.

The limit is based on "modified adjusted gross income," not regular adjusted gross income, meaning it's not always simple to figure out.

Did you owe more than your trade-in car was worth?

One shocking quirk will apply to far more new car buyers than many would imagine.

We're talking about buyers who owed more on their car loan than their trade-in vehicle was worth. Sometimes, consumers who are upside down on a car loan are able to roll over some of what they owe on an old loan into the new car loan. In most cases, the borrower also must bring money to the table to help offset the negative equity, Drury said.

The average down payment for consumers with a negative equity trade-in during the third quarter of 2025 was $2,721.

When it comes to the new tax break for car loan interest, you're not able to deduct interest paid on any negative equity that was rolled into the new car loan, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.

"The negative equity does not disqualify the entire loan," Luscombe said, "only the negative equity portion of the loan."

On Dec. 31, the Internal Revenue Service issued proposed guidance on the deduction for new car loan interest under the One Big Beautiful Bill Act, which was signed into law July 4 by President Donald Trump.

Trump initially rolled out the idea for a new tax break on car loans during a 2024 campaign stop at the Detroit Economic Club.

The Dec. 31 proposed guidance specifically refers to loans involving "negative equity."

The amount of the loan that qualifies for the new car loan deduction is what is used to buy the new car — and the negative equity in that car loan is not viewed as something directly related to the new passenger car or truck, according to the IRS guidance.

It's not a small point. A growing number of consumers are trading in cars and trucks that are worth much less than the amount of money they still owe on their old auto loans.

More than one in four new vehicle trade-ins were "underwater" or "upside down" in the third quarter of 2025, which was a four-year high, according to research from Edmunds.

In the third quarter last year, Edmunds noted that 28.1% of trade-ins toward new car purchases had negative equity, up from 26.6% in second quarter last year and 24.2% in first quarter last year.

The average amount owed on upside-down loans hit a record $6,905 in third quarter, edging past the previous high of $6,880 set in first quarter of 2025.

The IRS proposed guidance lists a complicated example of a taxpayer who obtained a $50,000 car loan on a vehicle that qualifies for the tax deduction. Let's say the consumer had $4,000 for the down payment but traded in a car that had $6,000 of negative equity.

In this case, the consumer is rolling $2,000 of negative equity into that new car loan. The down payment is subtracted from the $6,000 of negative equity.

In this example, the IRS notes that $48,000 would qualify for what it calls a "specified passenger vehicle loan" and $2,000 in that $50,000 car loan would not apply when calculating the tax break. The interest paid in a given year on $48,000 loan in this example would be deducted on Schedule 1-A.

The proposed guidance could change, but Luscombe said that it seems unlikely regarding negative equity situations.

Some key tax tips for claiming the car loan deduction

If you believe you qualify for the new deduction for car loan interest for a car loan taken out in 2025, experts offer these tips:

Get paperwork in order as early as you can. Tax professionals will ask that you bring the original loan and financing agreement, which would show the amount financed, whether the loan is a first lien, and whether there are any add-ons that would not qualify for a tax break, according to Elizabeth Young, director for tax practice and ethics with the American Institute of CPAs.

To qualify, the car loan must be secured by a lien on your car or truck. And that new car or truck must have seen its final assembly at a factory in the United States.

Insurance, including extended warranty coverage that was bought as an add-on, would not qualify as part of the car loan deduction, Young said.

Be prepared to bring in the VIN to your tax preparer so that the VIN can be reported on Schedule 1-A. The VIN often can be found on the purchase contract, insurance card for your auto insurance, the window sticker that was on the car when you bought it, or your state registration.

You want to make sure the VIN you report on Schedule 1-A is accurate. "If the VIN isn’t reported on the tax return, then there is no deduction," Young said.

Filing electronically can help, she said, because it would reduce the risk of omitting the VIN field from Schedule 1-A.

You can now see Schedule 1-A online; it's a new form that's needed for four new tax deductions — car loan interest, overtime, tips and a special deduction for taxpayers 65 and older.

Add up the interest: You're not deducting the entire monthly payment. You're deducting the interest paid each month. You're not deducting the amount of the entire loan, either.

"It is for the interest paid on the loan during the tax year; it is not the value of the loan itself,” said Mark Steber, chief tax officer for Jackson Hewitt.

For 2025 tax returns, the IRS said lenders can offer an online portal to buyers for spotting total amount of interest paid on new car loans in 2025.

Drivers also can review monthly statements or an annual statement that breaks down interest payments. "Like most loans, you should be able to obtain a year-end total interest paid statement from the loan company," said George Smith, a CPA with Andrews Hooper Pavlik in Bloomfield Hills, Michigan.

Lenders will be required to issue a 1098-VLI document that is a "vehicle loan interest statement" that will be used to claim a tax break on car loan interest paid in 2026 and after. But 2025 is viewed as a transitional year so lenders have the option of not issuing a 1098-VLI for interest paid in 2025 on new car loans.

"The best support to have would be a statement from the lender showing the interest paid on the car loan for 2025," Luscombe said.

Under the proposed regulations, he said, the lender would be required to issue that statement to the taxpayer by Jan. 31, 2026.

"However, for the 2025 year, the IRS has waived penalties on the lender for failure to provide the statement. Also, the statement is not required for interest totaling less than $600," Luscombe said.

If the statement is not received, the taxpayer will still be required to report information for interest paid on Schedule 1-A to claim the deduction.

Lawrence, of LaFontaine, said dealers are frequently helping customers who misplaced paperwork get copies at tax time and remain prepared to do so. A retail installment contract, he said, shows specific information, such as interest, when a loan is secured at the dealership.

If you secured the loan on your own, you'd need to reach out to the bank or credit union where you obtained the loan.

In 2025, the NADA notes, new car buyers should expect to receive car loan information by the end of January on a monthly statement, through their lender’s online portal, or through some other communication from the lender.

Pay attention to the details: The car loan deduction can trip you up when it comes to some in specific instances.

For example, "the buyer must be the first owner of the vehicle, but it can be any vehicle type, including electric and plug-in hybrid," Steber said.

Luscombe agreed that taxpayers wouldn't qualify for a tax break in situations where the car had another registered owner before the taxpayer. "Say, for example, if the dealer titled the vehicle for use as a loaner vehicle to customers whose vehicles are in for repair," Luscombe said.

What if you refinanced the car loan? "If a qualifying vehicle loan is later refinanced," the IRS notes, "interest paid on the refinanced amount is generally eligible for the deduction."

Proof of how you use the car: Strong noted that you'll need evidence that the car or truck is for personal use to claim the deduction on car loan interest. As a result, she said, be prepared to confirm that more than 50% of the expected use is personal.

Contact personal finance columnist Susan Tompor: [email protected]. Follow her on X @tompor.