What's Happening?
The Internal Revenue Service (IRS) has released guidance on a new tax deduction for car loan interest, which is set to affect millions of drivers across the United States. This deduction applies to interest paid on loans for new, U.S.-assembled vehicles
purchased for personal use after December 31, 2024. Taxpayers can write off up to $10,000 annually in interest, potentially increasing tax refunds and influencing the car purchasing landscape. The deduction is part of the 'No Tax on Car Loan Interest' provision in the One Big Beautiful Bill Act, signed by President Trump on July 4, 2025. The IRS guidance clarifies that the deduction can be claimed regardless of whether taxpayers itemize or take the standard deduction. However, the rules are complex, income-limited, and exclude used and leased vehicles. Certain lenders must report interest paid to the IRS, simplifying the claiming process.
Why It's Important?
This tax policy change is significant as it aims to make American-made vehicles more affordable for personal use, potentially boosting the automotive industry. The provision is expected to cost $31 billion over the next decade, with most eligible taxpayers seeing savings of a few hundred dollars in the first year. However, lower-income households, who are more likely to purchase used vehicles, may not benefit from this deduction. The policy could lead to increased demand for new vehicles, impacting manufacturers and dealers. Additionally, the change may influence consumer behavior, encouraging more purchases of U.S.-assembled cars.
What's Next?
The Treasury and IRS have opened a public comment period on the proposed regulations until February 2. Taxpayers can claim the deduction when filing their 2025 tax returns in 2026. The IRS is expected to finalize the start date for the 2026 tax season in early January. Early filers should be prepared for potential delays in tax refunds as they determine eligibility and gather necessary documentation. The public's feedback during the comment period may lead to adjustments in the final regulations.
