The New Car Loan Deduction: Too Good to Be True?

Q:

I heard the recently passed bill made interest on car loans deductible. Is that true? We’ve been holding off buying a car because they’ve gotten so expensive but does this change things? We don’t usually itemize, if that makes a difference.

A:

Yes, the law best known as the One Big Beautiful Bill Act will allow the deduction of auto loan interest from 2025 through 2028. Here are the details:

• Only new cars qualify, not used.
• The vehicle must have final assembly in the U.S. and be for your personal use.
  • The "VIN decoder" can be used to find out whether the vehicle’s plant of manufacture was located in the United States. 
• Only loans for purchases qualify, not leases, and the loan must have originated after Dec. 31, 2024.
• There’s a phase-out for the deduction starting at $100,000 for single filers and $200,000 for those married filing jointly. The phase-out is based on modified adjusted gross income.
• A maximum of $10,000 in interest can be deducted.
• You don’t need to itemize to take advantage of the deduction.
• Incidentally, if you’re interested in an electric vehicle, you can combine that tax credit with the deduction – but only if you purchase before Sept. 30, 2025, when the EV credit now expires.

So that’s the answer to the first question. The second question is not as simple to answer.

But we can say this with confidence: Don’t buy a car (or anything else) just to get a tax break.

Here’s what to think about as you approach this decision.

DO YOU NEED A CAR OR DO YOU JUST WANT A CAR?

If you need a car, then you need a car. It’s a big expenditure, but the good news is that this deduction may save you some money.

If you just want a new car, whether it’s a second “fun” car, an upgrade from your current car or a different kind of car that better fits your lifestyle – like moving to an EV or an SUV – it doesn’t mean it’s a bad financial decision. If your goals are funded and that’s how you want to spend your money, go for it.

Just make sure you’re fully weighing the tradeoffs and costs. The tax break could help you save money, but you’re still going to pay a lot.

On the other hand, if you’re behind on saving for an important goal like retirement and you have a functional car already, your financial advisor is probably going to tell you that upgrading now is not a smart idea.

SHOULD YOU GET A NEW CAR OR A USED ONE?

Common wisdom says that because cars depreciate so fast, it’s a better decision to buy one that’s newish but not new. You’ll still get the benefit of a new car’s style and reliability (and maybe even a warranty), but avoid the big value hit that comes right at the beginning.

There are, however, times that you may want a new car. Maybe incentives make the price comparable to a year-old car. Maybe only the newest model has the tech that you’re looking for. Or maybe this new tax benefit – only available on new cars – makes the math work.

SHOULD YOU BUY VS. LEASE?

Common wisdom also says that leasing is a bad financial decision. And yes, it can cost you more than buying outright. However, it’s not always just about the money. Deciding whether to lease vs. buy involves several considerations, one of which is now this tax deduction.

SHOULD YOU BUY A CAR THAT QUALIFIES FOR THE DEDUCTION?

Even once you’ve decided that yes, you’re going to move forward with the purchase of a new car, you’ll need to look closely at whether the car you want qualifies. If you have a choice between a car that’s assembled in the U.S. and one that’s not, the tax deduction might make the decision easy. Or, if dealerships drop the prices of non-U.S.-assembled cars to compensate for their reduced appeal, it might not.

HOW MUCH WILL YOU REALLY SAVE?

As you consider your options, don’t overweigh the impact that the tax deduction could have.

Here’s an example: Say you buy a car for $50,000, which is around the average in 2025. You put 20% down and finance the rest. Your loan is a 5-year loan at a 6% interest rate.

In 2026, the first full year of your loan, you might pay about $2,000 in interest.

Let’s also say your MAGI is $100,000, which puts you in the 22% marginal tax bracket if you’re married filing jointly. At that rate, a $2,000 deduction will save you less than $500 on your 2026 taxes.

Going forward, the deduction will be worth less each year; the way amortization works, you pay mostly interest early on, and more of your principal later. So, although your payments will stay the same, less will be going to interest. And, of course, the deduction is scheduled to disappear completely with over a year left on your loan.

THE BOTTOM LINE

The new auto loan deduction should not be the deciding factor when it comes to buying a car. At most, it could be a nice, but likely small, bonus at tax time. You should continue to weigh all the usual factors and talk to your financial advisor if you need help thinking through options.

WE HOPE YOU’VE FOUND THIS INFORMATION HELPFUL

Remember that any financial guidance must be adapted to your unique circumstances, so consult your financial planner. In the meantime, keep those questions coming!