Can You Really Deduct $10,000 in Car Loan Interest in 2025?

Shakh Kadirov
 
 car loan interest pic
 
 

The headlines sound exciting: “New Tax Break Allows You to Deduct $10,000 in Car Loan Interest!” But is it real? And can small and mid-sized business owners actually benefit?

Let’s break down what’s true, what’s exaggerated, and how to make this deduction work for you.

 What’s the New Tax Deduction?

In 2025, thanks to a provision in the recently passed “Big, Beautiful Bill”, a new personal tax deduction goes into effect. It allows eligible taxpayers to deduct up to $10,000 in interest paid on a qualifying auto loan—even if they take the standard deduction.

This is a major shift. Previously, interest on personal car loans was not deductible unless the vehicle was used for business purposes or financed through a business entity.

 Who Is Eligible?

To qualify for this deduction, the following requirements must be met:

  • You must purchase a brand-new vehicle (not used or leased)

  • Final assembly of the vehicle must take place in the United States

  • The deduction is phased out based on income:

    • Full deduction if your AGI is under $100,000 (single) or $200,000 (married filing jointly)

    • Partial deduction available up to $150,000 / $250,000

  • Deduction is capped at $10,000 in total interest paid, not a flat $10,000 off your taxes

 Important: This is a personal deduction, not a business one. So it applies on your individual return, not through an LLC or S Corp.

 What Does This Mean in Real Terms?

While the “$10,000” number grabs attention, here’s what you might actually save:

Let’s say you finance a $45,000 new car with a 6.5% interest rate over five years. You could pay about $7,800 in total interest.

If your income qualifies and you’re in the 22% federal tax bracket, your deduction could reduce your tax bill by approximately $1,700 over the life of the loan. That's meaningful savings, even if it’s not a full $10K windfall.

 What Doesn’t Qualify?

Not every car loan is eligible. Here's what’s excluded:

  • Used or leased vehicles

  • Vehicles purchased before 2025

  • Income above the phase-out limits

  • Vehicles not assembled in the U.S.

  • Interest paid through a business loan or business-owned vehicle

 Business Use vs. Personal Deduction: What’s Better?

For small business owners, the line between personal and business vehicle use often blurs. It’s important to compare:

Deduction Type Use Case
Section 179 / Bonus Depreciation Business vehicle, placed in service for work use
New Car Loan Interest (2025) Personal vehicle, new, U.S.-assembled, income limits apply
 
If you plan to use your car primarily for business, you may still benefit more from traditional business deductions. If it’s personal and meets the new criteria, the 2025 deduction is a great bonus.

 How to Prepare Now

Here are a few smart steps you can take:

  • Plan your car purchase for early 2025 to ensure eligibility

  • Verify the vehicle’s final assembly location (you can use the VIN or ask the dealer)

  • Track all loan documents and interest payments carefully

  • Talk to a tax professional to compare your options (especially if you use the car for both business and personal reasons)

 Final Thoughts

The 2025 car loan interest deduction won’t make everyone rich—but it can put hundreds or even thousands back in your pocket if you plan wisely.

As a business owner, every tax advantage counts. Whether you’re considering a personal car or a fleet of business vehicles, aligning your tax strategy with upcoming changes is key.

Need help analyzing what’s best for your situation?

📅 Schedule a tax strategy session with KFM

 

 

 

 

 

 


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