Learn how the IRS’s new temporary deduction for vehicle loan interest (2025–2028) offers rare tax relief for individuals in the United States, even though personal interest is usually non-deductible.
Introduction
Generally, personal interest expenses—such as credit card interest, car loan interest, and most consumer borrowing—are not tax deductible. However, beginning in 2025, a new law carves out a temporary exception for certain vehicle loan interest. This provision is available for four years, from 2025 through 2028, and could provide meaningful tax savings for qualifying U.S. taxpayers.
Background: The General Rule
Under the Internal Revenue Code, personal interest (interest on loans unrelated to business or investment purposes) has been disallowed as a deduction since the 1986 Tax Reform Act. This means:
- Credit card interest → Not deductible
- Car loan interest → Not deductible
- Personal loans → Not deductible
Only certain categories of interest are deductible, such as mortgage interest and investment interest expense. Until now, auto loans have never been on the deductible list.
The Temporary Vehicle Loan Deduction (2025–2028)
For tax years 2025 through 2028, Congress has created a unique tax incentive tied to vehicle financing. Taxpayers may claim a limited deduction for interest paid on qualifying vehicle loans.
Key Features:
- Applies to new vehicle purchases only (not refinancing existing loans).
- Vehicle must be primarily for personal use.
- Deduction capped at $1,000 of interest per year, per taxpayer.
- Available whether or not the taxpayer itemizes deductions.
- Runs only for tax years 2025, 2026, 2027, and 2028.
Who Qualifies?
To qualify for this special deduction:
- You must have purchased a new car, truck, or SUV in 2025–2028.
- The loan must be in your name and actively accruing interest.
- The vehicle must be used for personal driving needs, not business fleets or rentals.
Married couples filing jointly can each deduct up to $1,000 annually if both have qualifying loans.
How to Claim the Deduction
Claiming this deduction is designed to be straightforward. Taxpayers will:
- Receive a Form 1098-V from their lender showing interest paid.
- Report the allowable deduction on the revised Schedule A (or direct line on Form 1040).
- Ensure they do not exceed the $1,000 annual cap.
Tax Planning Strategies (2025–2028)
- Buy sooner than later: Interest deductions apply beginning in 2025—delaying a purchase may reduce your deduction window.
- Track interest carefully: Maintain records from lenders to prove eligibility.
- Coordinate with other deductions: If you already claim state and local tax (SALT) or mortgage interest, this new deduction adds incremental savings.
- Consider filing jointly: Married couples with two loans may double the benefit.
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What Happens After 2028?
Unless extended by Congress, this deduction will expire after December 31, 2028. After that, car loan interest will revert to its traditional status as non-deductible personal interest. Taxpayers considering major vehicle purchases should evaluate timing to maximize benefits before the sunset date.
