How to Qualify for the New Car Loan Interest Deduction – Kelley Blue Book

The “No Tax on Car Loan Interest” provision in the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, offers a potential tax deduction on interest paid for certain new car loans. Despite the simple name, this benefit is not automatic. It applies only to new car buyers who meet every requirement set out in the law, including income limits and a U.S. final assembly requirement for the vehicle.

What the deduction does—and doesn’t—do

This provision does not eliminate interest charges on auto loans or grant a blanket tax break for all borrowers. Instead, it allows eligible taxpayers to deduct qualified interest paid on a loan for an eligible new vehicle. If you fail to meet even one requirement, you won’t qualify. If you meet them all, you may be able to claim the deduction. Always confirm your specific eligibility with a tax professional.

Key eligibility principles

• Applies to new car buyers only. Used vehicles do not qualify under this provision.
• Eligibility is subject to strict rules, including income limits set by law.
• The vehicle must meet a U.S. final assembly requirement.
• All criteria must be met—missing any single requirement disqualifies the deduction.

U.S. final assembly requirement

To qualify, the vehicle’s final assembly must occur in the United States. There are multiple ways to verify where a specific car was assembled. Make sure to confirm the assembly location during your shopping process so you don’t unintentionally purchase a vehicle that fails this test. If you plan to buy a new car in the next few years and want to use this deduction, incorporate the U.S. assembly requirement into your initial research and decision-making.

Planning your purchase

• Before you buy, verify that the model you’re considering is assembled in the U.S.
• Assess whether your income falls within the eligibility limits for the deduction.
• Keep thorough records from the start of your purchase process, including the vehicle identification number (VIN) and your loan documentation.

Transitional rules for the 2025 tax year

For tax year 2025, the IRS is providing transitional relief. Lenders will not be required to use a new tax form specifically for this provision. However, lenders and any other recipients of qualified interest must still provide borrowers with a statement by January 31, 2026, showing the total amount of interest paid on the qualified vehicle loan during 2025.

Documents you’ll need

• Interest statement from your lender (covering the total qualified interest paid in 2025).
• The vehicle’s VIN.

How to claim the deduction

1. Confirm your eligibility: Ensure you meet all requirements, including income limits and the U.S. final assembly rule for the specific vehicle you purchased.
2. Gather your documentation: Collect the lender’s interest statement for 2025 and the vehicle’s VIN.
3. Complete the required tax schedule: Use Schedule 1-A when filing your 2025 federal tax return to report the qualified interest.
4. File on time and keep records: Retain your purchase documents, loan statements, and assembly verification in case of questions.
5. Consult a tax professional: Tax rules can change, and individual situations vary. A professional can confirm your eligibility and ensure compliance with current IRS guidance.

Smart shopping tips to stay eligible

• Shortlist vehicles that meet the final assembly requirement before visiting a dealership.
• Discuss eligibility with the dealer and your lender upfront so you know what documentation to expect.
• Monitor any IRS updates that may affect how the deduction is reported or documented for the 2025 return.

Bottom line

The car loan interest deduction created by the OBBBA can reduce your tax bill—but only if you buy a new vehicle that meets the U.S. final assembly requirement and you satisfy all other eligibility rules, including income limits. For 2025 returns, expect an interest statement from your lender by January 31, 2026, and be prepared to file Schedule 1-A with your VIN and other records. When in doubt, verify every detail with a tax professional to ensure you qualify and file correctly.