Common Questions to the Car Loan Interest Deduction

Written By Brandy Sparkman

To finish our series on the new 2025–2028 car loan interest deduction, here are answers to the questions taxpayers are most likely to have. This issue ties together the key rules and helps you apply them in real life.

Does this apply to leased cars?

No. Leases are specifically excluded. Only loans with a qualifying first lien count.

Can I claim the deduction if I use the car for business?

This new deduction is for personal-use vehicles only.
Business-use vehicles follow their own rules and do not qualify under this provision.

What about used cars?

Used cars do not qualify. The law requires that the original use of the vehicle begin with the taxpayer, meaning new vehicles only.

Do salvage or rebuilt-title vehicles qualify?

No. Vehicles with a salvage title or that are used for scrap or parts are explicitly excluded from the deduction.

What documentation do I need?

To claim the deduction, you must have:

  • Your annual loan interest statement (or lender-provided documentation)

  • Remember the loan is a first-lien loan

  • The vehicle’s VIN (must be reported on the tax return)

Good documentation ensures the deduction is allowed and prevents reporting delays at tax time.

How does the deduction work for married filing separately (MFS)?

The new act allows each spouse to claim up to the deduction limit independently, meaning MFS couples may deduct up to $10,000 each, depending on how loans and ownership are structured. The most recent federal update clarified that the deduction applies per tax return.

What if my income is too high?

The deduction begins to phase out once your Modified Adjusted Gross Income (MAGI) exceeds the income thresholds of $100,000 ($200,000 for joint filers). Above the threshold, your deduction reduces gradually.

Final Thoughts

This new deduction is a meaningful change for individuals planning to purchase a new, U.S.-assembled, personal-use vehicle between 2025 and 2028. Understanding the rules now helps you make informed decisions when financing a new car.

Each week, I share a clear, bite-sized tax insight straight from my continuing education so you can stay informed without sifting through tax changes.

Next week, we share an update on the upcoming format change for the Tax Minute.

Thanks for reading,

Brandy Sparkman, EA

I’ll keep learning so you can stay focused on what you do best.

See you next week for another Tax Minute.

Brandy Sparkman
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How the New Car Loan Interest Deduction Works