The Internal Revenue Service gave auto lenders some idea of how they’ll handle a brand new deduction for car loan interest in 2025.
Lenders must provide appropriate information so that consumers who took out a car loan in 2025 to buy new cars with final assembly in the United States can claim the deduction on their 2025 federal income tax returns next year, if they qualify.
Yet, we’re dealing with a quick transition involving a tax change that was signed into law by President Donald Trump on July 4 but retroactively covers car loans taken out going back to Jan. 1.
The transitional guidance released by the IRS on Tuesday, Oct. 21, gives lenders some room for avoiding penalties when it comes to reporting requirements.
For example, lenders will have met their reporting obligations for interest received on a qualified passenger car loan in 2025, according to the IRS, if the lender makes a statement available to the buyer indicating the total amount of interest received.
Specifically, the IRS notes that lenders can meet their reporting requirements by making this total amount of interest available:
The new deduction is part of the One, Big, Beautiful Bill Act. Beginning on 2025 tax returns, new car buyers might qualify for a specific deduction of up to $10,000 in car loan interest in a year.
Most people, of course, do not pay $10,000 in interest on their car loans in a single year. But car loan interest payments do tend to be frontloaded in the first year of the car loan, so the deduction in the first year could be significant. The interest must be paid on a new car loan that originated Jan. 1 or later.
Tom O’Saben, enrolled agent and director of tax content and government relations for the National Association of Tax Professionals, noted that you can deduct interest from two new car loans in the same tax year, as long as both vehicles and loans meet all eligibility rules.
Borrowers who took out a car loan in 2025 will need to file a new Schedule 1-A with their 2025 federal income tax returns that will be filled out next year to claim the deduction.
The new schedule includes a spot where you’ll need to list the vehicle identification number associated with the car loan being claimed.
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To claim a tax break on the 2025 return, it is important to remember that the auto loan must be taken out in 2025 to buy a new car with its final assembly in the United States.
The IRS notes that the location of final assembly will be listed on the vehicle information label attached to each vehicle on a dealer’s premises.
“Alternatively, taxpayers may rely on the vehicle’s plant of manufacture as reported in the vehicle identification number (VIN) to determine whether a vehicle has undergone final assembly in the United States,” the IRS stated in a fact sheet issued in July.
The tax break will not apply to car loans taken out to buy a used car — or new cars or new trucks with final assembly outside of the United States.
A qualified passenger vehicle is a car, minivan, van, SUV, pick-up truck or motorcycle, with a gross vehicle weight rating of less than 14,000 pounds.
This deduction can be taken if you claim the standard deduction, as most people do these days, or itemize your deductions.
A general ballpark estimate suggests that tax savings could range from around $300 to $900 per year for many new car buyers, according to an estimate provided earlier to the Detroit Free Press by Patrick Anderson, CEO of the Anderson Economic Group consulting firm in East Lansing.
The car loan interest deduction is treated as a below-the-line deduction that is subtracted after your adjusted gross income has been determined. It will not reduce your AGI and not help you tap into some credits or other tax breaks.
Income limits do apply so many high-income households will not qualify.
The deduction phases out by $200 for every $1,000 of modified adjusted gross income above $100,000 for single filers and $200,000 for joint filers.
A single person with $149,001 in income or more would not receive any deduction, said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
The deduction phases out entirely, he said, for a married couple with $249,001 or more in modified adjusted gross income.
On Oct. 21, the IRS issued Notice 2025-57 to provided transitional relief for 2025 for lenders and others who are required to file information returns with the IRS and provide statements to borrowers showing the total amount of interest received on qualified passenger vehicle loans and other information related to the loan.
The IRS said it will not impose penalties on lenders for failing to file information returns and provide payee statements if they satisfy their reporting obligations in one of the many ways described in the notice, according to the transition relief provided for 2025.
The new deduction on car loan interest can come into play for eligible taxpayers who buy a vehicle for personal use. The tax break currently runs from 2025 to 2028.
On Oct. 21, the IRS also noted that businesses that receive from any individual interest of $600 or more for any calendar year on a qualified passenger vehicle loan must comply with the new reporting requirements.
The IRS issued a fact sheet on July 14, which was later updated with more information on the new deduction on car loan interest.
Contact personal finance columnist Susan Tompor: stompor@freepress.com. Follow her on X @tompor.

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