If you are financing a new vehicle in the United States, a recently enacted tax provision could reduce your tax bill by hundreds, potentially thousands, of dollars each year.
The IRS and US Treasury published official guidance on 31 December regarding the ‘No Tax on Car Loan Interest’ provision, part of the One Big Beautiful Bill Act signed into law on 4 July 2025 as Public Law 119-21, according to the IRS. This measure allows eligible buyers to deduct up to $10,000 (£7,412) in car loan interest annually from their taxable income, whether they itemise deductions or take the standard deduction.
How Much Could You Actually Save?
The key point is that this provision lowers your taxable income, not your actual tax liability directly. The average interest rate on new car loans stood at 6.56% in Q3 2025, according to Experian’s State of the Automotive Finance Market report. With the average new car loan amounting to approximately $42,000 (£31,136), borrowers typically pay around $2,500 (£1,853) in interest during the first year of their loan.
For a taxpayer in the 24% federal tax bracket claiming that $2,500 (£1,853) deduction, the real-world benefit equates to roughly $600 (£460) in tax savings. Those financing more expensive vehicles or facing higher interest rates—particularly borrowers with lower credit scores, who face rates averaging 15.85% according to Experian—could see significantly larger benefits.
This provision is available from tax year 2025 through 2028, giving qualifying buyers a four-year window to claim the deduction.
The Strict Rules You Must Follow
Not everyone qualifies. The IRS guidance specifies several eligibility criteria that must all be met.
Your modified adjusted gross income must be below $100,000 (£74,141) for single filers or $200,000 (£148,284) for joint filers to claim the full deduction. The benefit phases out at a rate of $200 (£148.28) for every $1,000 (£741.42) your income exceeds those thresholds, disappearing entirely at $150,000 (£111,213) for individuals and $250,000 (£185,355) for couples.
The vehicle must weigh under 14,000 pounds and must have undergone final assembly in the United States, according to the IRS fact sheet. The car can be bought by an individual; it was never intended for company use or profit goals.
Crucially, the loan must originate after 31 December 2024 and be secured by a lien on the vehicle. Lease payments are explicitly excluded from this benefit.
Verifying Your Vehicle Qualifies
The IRS states that taxpayers can verify a vehicle’s assembly location using the Vehicle Identification Number (VIN). The National Highway Traffic Safety Administration’s Decoder tool confirms where final assembly occurred. VINs beginning with 1, 4, or 5 typically indicate US assembly.
For any year in which you claim the deduction, you must include the VIN on your tax return. Lenders are required to provide borrowers with a statement showing total interest paid by 31 January 2026 for the 2025 tax year, with formal Form 1098 reporting starting in 2026.
The Fiscal Reality
The nonpartisan Joint Committee on Taxation estimates that this provision will cost the federal government around $31 billion (£23 billion) over fiscal years 2025 to 2034, making it among the top 25% of the most costly measures in the One Big Beautiful Bill, according to analysis from the Bipartisan Policy Center.
While the deduction offers a significant opportunity for qualifying buyers, it mainly benefits those who can afford new American-made vehicles and meet the income thresholds. With car affordability already strained by rising interest rates, the measure aims to ease borrowing costs during a challenging market.
The IRS is accepting public comments on the proposed regulations until 2 February 2026 via Regulations.gov. As with any tax matter, consulting a qualified professional before making major purchasing decisions remains advisable.
Originally published on IBTimes UK
