The new "No Tax on Car Loan Interest" law introduces a valuable tax break for taxpayers beginning in 2025. For the first time, individuals can deduct interest paid on personal use car loans—something that was previously treated as a nondeductible personal expense. This change offers meaningful relief to taxpayers who finance their vehicles, but it comes with specific rules, limits, and eligibility requirements that must be understood to claim the benefit correctly.
Quick Facts: No Tax on Car Loan Interest
- Up to $5,000 deduction (Single) and $10,000 (MFJ) is allowed for qualified car loan interest
- Applies only to personal use vehicles, not business use vehicles
- Car must be personally owned, and the loan must be in the taxpayer's name
- Deduction is above the line, meaning it is available to both itemizers and non-itemizers
- Phase out begins at:
- $150,000 MAGI (Single)
- $300,000 MAGI (MFJ)
- Not available for Married Filing Separately (MFS). Married taxpayers must file MFJ to claim it
- Leases do not qualify — only interest on a financed purchase
- Taxpayers should keep loan statements and interest summaries for documentation
What This Means for Taxpayers
This new deduction represents a significant shift in tax policy. Previously, interest on personal car loans was considered a nondeductible personal expense, similar to credit card interest. Beginning in 2025, taxpayers who finance their personal vehicles can deduct a portion of the interest paid, potentially saving hundreds or even thousands of dollars on their tax bills.