Car loan interest on a personal vehicle is now tax deductible under a new provision signed into law, but only if you purchased a new American-made vehicle with a loan taken out after December 31, 2024. The deduction is capped at $10,000 per year and applies whether you take the standard deduction or itemize. Before this change, personal car loan interest was not deductible at all. If you use a vehicle for business, different rules apply and have been available for years.
The New Deduction for Personal Vehicles
The new car loan interest deduction covers interest paid on loans used to buy new vehicles manufactured in the United States for personal use. The loan must have been taken out after December 31, 2024, so if you financed a car before that date, the interest on that older loan does not qualify.
The annual deduction limit is $10,000. To put that in perspective, if you financed $40,000 at 7% interest, you would pay roughly $2,800 in interest during the first year of the loan. Most borrowers will fall well under the cap unless they are financing a very expensive vehicle at a high rate. The deduction is available to all eligible filers regardless of whether they itemize or take the standard deduction, which makes it unusually accessible compared to most tax breaks that require itemizing.
The key qualification is that the vehicle must be a new, made-in-America car or truck. Used vehicles and foreign-manufactured models do not qualify for this deduction. The Treasury and IRS have issued proposed regulations clarifying the details, so the specific definition of “made in America” and other eligibility rules may be refined as final guidance is released.
Business Use: A Separate Set of Rules
If you are self-employed or run a business and use your vehicle for work, you can deduct car loan interest as a business expense on Schedule C. This has been true for years and is separate from the new personal-use deduction. The catch is that you can only deduct the portion of interest that corresponds to your business use of the vehicle.
Say you drive 15,000 miles in a year and 9,000 of those miles are for business. Your business-use percentage is 60%. If you paid $2,000 in loan interest that year, you could deduct $1,200 on Schedule C. The remaining $800 tied to personal use could potentially qualify for the new personal-use deduction if the vehicle meets the made-in-America requirement. However, you cannot claim the same interest dollar under both deductions.
This business deduction only works if you use the actual expense method to calculate your vehicle costs. If you choose the standard mileage rate instead (which bundles fuel, maintenance, depreciation, and insurance into a per-mile rate), you cannot separately deduct interest, depreciation, or lease payments. You pick one method or the other for a given vehicle, so it is worth running the numbers both ways to see which saves you more.
Who Cannot Deduct Car Loan Interest
Several common situations still leave car loan interest fully nondeductible. If you bought a used car for personal use, the new deduction does not apply. The same goes for a new vehicle manufactured outside the United States. And if your loan was originated before January 1, 2025, the interest on that loan does not qualify regardless of what kind of vehicle you drive.
W-2 employees who drive for work but are not self-employed generally cannot deduct vehicle expenses at all on their federal return, even if their employer does not reimburse them. The Tax Cuts and Jobs Act suspended the unreimbursed employee expense deduction through 2025, and any extension or change depends on future legislation.
Vehicle Registration Fees You Can Deduct
Even when car loan interest is not deductible, part of your annual vehicle registration fee might be. If your state calculates a portion of the registration fee based on the vehicle’s value (called an ad valorem tax), that portion qualifies as a deductible personal property tax when you itemize on Schedule A. The flat fee portion of registration, such as a base plate fee, does not count. Your registration renewal notice or your state’s DMV website usually breaks out the value-based portion from other fees.
How to Claim the Deduction
For the new personal-use deduction, the interest is reported on Schedule 1-A of Form 1040. Your lender should provide a year-end statement showing the total interest paid, similar to how mortgage lenders issue Form 1098. Keep that statement with your tax records.
If you are self-employed and splitting interest between business and personal use, report the business portion on Schedule C and the personal portion (if the vehicle qualifies) on Schedule 1-A. You will need a mileage log or similar record showing how you split driving between business and personal trips. The IRS expects contemporaneous records, meaning you track mileage throughout the year rather than estimating after the fact.
For the ad valorem portion of registration fees, include that amount on Schedule A under personal property taxes. This only helps if your total itemized deductions exceed the standard deduction, and keep in mind that the combined deduction for state and local taxes (including property taxes and income or sales taxes) is capped at $10,000 for most filers.