Understanding consumer tax deductibility has never been simple—and 2025 has added a new wrinkle. Thanks to recent updates in the tax code, certain Americans can now deduct interest paid on personal-use vehicle loans. It’s a notable shift from long-standing rules that excluded most consumer interest, and it opens the door for more strategic tax planning.
But like most tax benefits, the details matter. Not all car loans qualify. Credit card interest remains off the table. And navigating eligibility—based on income, loan structure, and vehicle type—requires more than a casual glance at the headlines.
Here’s what you need to know about the new deduction, what still doesn’t qualify, and how to take full advantage of the opportunity, especially with a Harness tax advisor to help.
Table of Contents
- What is consumer tax deductability—and why interest usually isn’t deductible
- New in for 2025: Car loan interest is deductible—if you qualify
- Which loans do not qualify for deduction
- Vehicle eligibility: What counts under the new deduction
- Filing and reporting: What you’ll need to claim the deduction
- What Harness clients should know
What is consumer tax deductability—and why interest usually isn’t deductible
Consumer interest tax deductibility refers to which types of interest payments individuals can subtract from their taxable income. For decades, the tax code has excluded most personal interest from being deductible, and the rules haven’t changed much… until now.
Why most personal interest isn’t deductible
Since the Tax Reform Act of 1986, the IRS has defined personal expenses—like interest on credit cards or personal car loans—as non‑deductible. Credit card interest, as confirmed by both IRS sources and financial outlets, remains firmly non‑deductible for individuals paying for routine expenses.
There are a few exceptions—interest on student loans, certain home mortgages, and business-related borrowing—but for most consumer purchases, you’re paying interest after tax with no deduction.
What’s changing in 2025
As of 2025, eligible individuals may deduct up to $10,000 of interest on qualified car loans—even without itemizing deductions. This marks the first meaningful expansion of consumer interest deductibility in nearly four decades.
New in for 2025: Car loan interest is deductible—if you qualify
For the first time in decades, certain personal car loan interest is now deductible, thanks to a key provision in the One Big Beautiful Bill (OBBB), effective for tax years 2025 through 2028. But as with most tax benefits, eligibility depends on meeting a set of strict requirements.
Unlike traditional deductions that require itemizing, this one is above-the-line—meaning it can be claimed regardless of whether you itemize or take the standard deduction. That’s a significant shift, especially for middle-income taxpayers who don’t typically itemize but still carry vehicle financing.
Who qualifies?
You may be eligible to deduct up to $10,000 per year in interest paid on a car loan if:
- The vehicle is brand new (original use starts with you)
- It’s used strictly for personal purposes
- The loan was originated after December 31, 2024
- The vehicle underwent final assembly in the United States
- Your income falls within the phase-in range (details coming up)
Importantly, this deduction excludes leases, loans without a primary lien, and any vehicle used for business or commercial activity.
What kind of savings are realistic?
The actual tax savings depend on your bracket. For example:
- In the 22% bracket, $3,000 in eligible interest saves about $660
- In the 12% bracket, the same amount yields about $360 in savings
While the deduction caps at $10,000, most borrowers will fall well below that based on typical auto loan structures.
Which loans do not qualify for deduction
While the 2025 rules open a new door for deducting personal car loan interest, not all types of interest make the cut. In fact, most forms of consumer interest remain non-deductible under the updated tax code.
Credit card interest
Even if you use a credit card to finance a vehicle purchase—or cover related expenses like a down payment or maintenance—the interest you pay on that card is not deductible. The IRS continues to treat credit card interest on personal spending as a non-deductible expense, regardless of the purpose.
Personal loans and refinancing exceptions
Generic personal loans, family loans, or any financing that isn’t secured by the vehicle itself don’t qualify for this deduction. The law is clear: the loan must have a first-position lien on the car, and the vehicle must serve as collateral.
Refinanced car loans may still qualify—but only if the original loan met all requirements and the refinancing is properly documented. Ineligible refinances (such as those that remove the lien or convert the use to business) lose the deduction.
Vehicle leases
Leases are explicitly excluded. Even if your leased vehicle meets all the other criteria—new, personal use, U.S. assembly—you’re not paying loan interest, so there’s no deduction available. This rule reinforces the legislation’s aim to support ownership, not access.
Vehicle eligibility: What counts under the new deduction
To qualify for the new car loan interest deduction in 2025, not just any car will do. The IRS has set strict criteria around the type of vehicle, how it’s used, and where it’s built. Here’s what you need to know before assuming your purchase will qualify.
Only new vehicles qualify
The deduction only applies to loans used to purchase new vehicles. That means the car must be brand-new, with original use starting with the taxpayer. Even low-mileage used cars or dealer-certified pre-owned vehicles do not count—if someone else has titled or registered the car before you, it’s ineligible.
Final assembly must be in the United States
The law also requires that qualifying vehicles undergo final assembly in the U.S. You can verify this using the vehicle’s VIN (Vehicle Identification Number):
- VINs beginning with 1, 4, or 5 indicate U.S. assembly
- You can double-check through the NHTSA VIN Decoder, which confirms the manufacturing plant
This rule affects more than just foreign brands—some American automakers build vehicles abroad, and those won’t qualify.
Weight and design limits apply
Qualifying vehicles must:
- Be designed for public roads
- Have at least two wheels
- Weigh less than 14,000 pounds (this excludes most commercial trucks and RVs)
This includes most passenger cars, SUVs, minivans, pickups, and even motorcycles—as long as they meet the U.S. assembly requirement.
Must be for personal use
Lastly, the deduction is limited to personal-use vehicles only. Cars used for business, commercial operations, or fleet purposes do not qualify. The IRS is expected to monitor this closely, so taxpayers should maintain clear records confirming the nature of the vehicle’s use.
Filing and reporting: What you’ll need to claim the deduction
Even if you’ve purchased a qualifying vehicle and meet the income requirements, claiming the consumer tax deductibility benefit for car loan interest in 2025 isn’t automatic. The IRS has introduced new documentation and reporting requirements to ensure only eligible taxpayers receive the benefit.
VIN must be included on your tax return
To claim the deduction, you’ll need to enter the full Vehicle Identification Number (VIN) on your tax return for any year in which the interest deduction is claimed. This requirement helps the IRS verify that:
- The vehicle meets the final assembly rules
- It was purchased new
- It hasn’t already been claimed under someone else’s return
Lenders are now required to report interest
Your lender must also file an information return with the IRS showing the total interest you paid for the year. This statement must also be provided to you, similar to how mortgage interest (Form 1098) is reported.
While IRS systems are still adapting, transition relief will be in place for the 2025 tax year. This gives lenders time to update their processes and ensures taxpayers aren’t penalized for incomplete reporting during the first year.
What paperwork to keep
To support your claim, maintain:
- A copy of the loan agreement showing origination date and terms
- Proof of the lien on the vehicle (must be a first lien)
- Purchase documentation showing the car was new and for personal use
- A printout from the NHTSA VIN decoder, if needed, confirming U.S. assembly
Proper documentation is an essential piece of information. In the event of an audit, the IRS will expect clear evidence your vehicle met all eligibility criteria.
What Harness clients should know
The new car loan interest deduction marks a rare shift in consumer tax deductibility—offering potential savings for qualified borrowers, but only if all the right boxes are ticked. From income thresholds to vehicle eligibility and detailed IRS reporting, the benefit is real, but so are the requirements.
If you’re a Harness client, here’s what this means for you:
- We’ll help confirm whether your vehicle and financing qualify under the new rules.
- Our team can ensure your documentation—like the VIN and lender reporting—is accurate and audit-ready.
- Most importantly, we’ll integrate this deduction into your broader tax and wealth strategy, so it works in tandem with your goals.
As this provision only lasts through 2028, now is the time to act. Get started with Harness to make sure you’re optimizing this new deduction while staying fully compliant.
Disclaimer:
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