The Internal Revenue Service (IRS) of the United States issued formal guidance on December 31 regarding tax deductions for car loan interest, affecting millions of car owners across the country.
This action is based on the “No Tax on Car Loan Interest” provision in the Omnibus Budget Reconciliation and Balanced Budget Act (OBBBA), which was signed into law by President Donald Trump on July 4, 2025.
This marks a significant adjustment in federal tax policy that could increase tax refunds for eligible Americans in the 2026 tax season, making American-made cars more accessible for individual use and reshaping the nation’s car purchasing landscape.
The new deduction for car loan interest applies to interest paid on loans for new cars assembled in the United States for personal use, purchased after December 31, 2024.
Vehicles must meet the following criteria:
1. Brand new products;
2. Finally assembled in the United States;
3. Purchased for personal use (cannot be used for commercial or business purposes on the day of purchase);
4. Interest calculated after December 31, 2024.
This tax deduction has income limitations for car owners and excludes many common financing options such as used cars, leased vehicles, and vehicles used for business purposes.
Taxpayers are allowed to deduct up to $10,000 of eligible new car loan interest annually.
According to CBT News, most eligible taxpayers are expected to save hundreds of dollars in the first year, with the total cost of this provision projected to reach $31 billion over the next decade.
Certain lending institutions are required to report to the IRS the interest payments made by borrowers and provide this information to taxpayers for use in filing taxes. Taxpayers can apply for this new deduction when filing their 2025 tax returns in 2026 and should gather necessary documentation in advance.
Taxpayers have the option to itemize deductions or take the standard deduction, both of which are permissible.
The Department of the Treasury and the IRS are currently inviting public comments on the proposed regulations via Regulations.gov, with a deadline of February 2.
Kevin Hassett, Director of the White House National Economic Council, stated in an interview with Fox Business Channel on December 18, “We are going to experience the largest tax refund surge in American history, with people set to receive significant refund checks.”
(Adapted from reporting by Newsweek)