The average new vehicle now sells for about $50,000, and the average new-car loan runs 6.35% over nearly six years — a payment of $765 a month (Kelley Blue Book, Experian). Prices, rates, and loan terms all moved the wrong way at once, and for a lot of households cars have simply become unaffordable.

One small offset: a new federal deduction lets some buyers write off up to $10,000 a year of car loan interest, for tax years 2025 through 2028. It is narrow, it is temporary, and most people who qualify have never heard of it.

What the Deduction Actually Is

Personal car loan interest had not been deductible since the Tax Reform Act of 1986. The law signed on July 4, 2025 carved out a temporary exception for tax years 2025 through 2028 (IRS FS-2025-03).

The headline terms: up to $10,000 of qualifying interest a year, deductible whether or not you itemize. That second part matters, because roughly nine in ten filers take the standard deduction and would otherwise get nothing.

The $10,000 cap is per return, not per person. A married couple financing two qualifying cars shares one $10,000 ceiling.

Five conditions, all of which must hold

1. The loan originated after December 31, 2024. A 2024 purchase does not qualify, no matter how much interest you are still paying.
2. The vehicle is new to you. Original use must begin with you. Used vehicles are out, and so are leases — lease payments are not loan interest.
3. Final assembly occurred in the United States. Not the brand’s nationality. Several imported nameplates assemble here, and several American nameplates do not. Check the window sticker or run the VIN through the NHTSA VIN Decoder.
4. The loan is secured by a lien on the vehicle. A personal loan, a HELOC, or a credit card used to buy the car does not qualify, even though the money bought the same vehicle.
5. The vehicle is for personal use — a car, minivan, van, SUV, pickup, or motorcycle under 14,000 pounds GVWR. Fleet and commercial use are excluded.

You also have to put the VIN on your return. Starting with tax year 2026, lenders report the interest on Form 1098-VLI; for 2025 they issued a statement. The deduction is claimed on Schedule 1-A.

The income phase-out is steep

The deduction shrinks by $200 for every $1,000 of modified adjusted gross income above $100,000 single or $200,000 joint, and it is gone entirely $50,000 above those thresholds.

The reduction comes off the deduction itself, not off the $10,000 ceiling. A single filer with $110,000 of MAGI who paid $4,200 of qualifying interest deducts $2,200, not $4,200.

What It Is Worth in Dollars

Take the average new-car loan: $44,000 at 6.4% over 72 months, bought in 2026. The payment is $738. Over the full loan the buyer pays $9,103 in interest, but only the interest falling in 2026, 2027, and 2028 is deductible.

Tax year	Interest paid	Deductible	Tax saved at 22%
2026	$2,636	$2,636	$580
2027	$2,226	$2,226	$490
2028	$1,790	$1,790	$394
2029–2031	$2,451	$0	$0
Total	$9,103	$6,652	$1,463

Illustrative. Assumes the buyer is under the phase-out threshold and stays in the 22% bracket. Your figures will differ.

About $1,500 over three years, or roughly $40 a month against a $738 payment. Real, but not enough to change what car anyone should buy.

The $10,000 cap is a red herring. At 6.4%, you would need a loan of roughly $167,000 to generate $10,000 of interest in a single year. Almost nobody is limited by the cap. The binding constraints are the income phase-out and the 2028 expiration.

The front of the loan is where the money is. Interest is heaviest in the early years and the deduction window is fixed. A car financed in 2025 gets four deductible years; one financed in 2028 gets one.

It is a deduction, not a credit. It reduces taxable income, so it returns your marginal rate — 12 or 22 cents on the dollar for most households, and less inside the phase-out band.

If Rates Fall and You Refinance

A refinance keeps the deduction as long as you do not take cash out, do not roll in negative equity from a trade-in, and the new loan stays secured by a first lien on the same car (final regulations, September 8, 2026). Refinancing a pre-2025 loan does not create eligibility — the origination date that counts is the first one.

Refinance on the rate regardless. Not paying the interest returns the whole dollar; the deduction returns only a fraction of it. Just compare total cost rather than the monthly payment, since a longer term can raise total interest even at a lower rate.

What to Know, and How to Get the Most From It

• Check whether you already qualify. If you financed a new car after December 31, 2024 and never claimed this, an amended 2025 return is available.
• Verify final assembly before you sign. This is the condition that disqualifies the most buyers, and the only one you cannot fix later. The window sticker or the NHTSA VIN Decoder settles it in a minute.
• Watch the MAGI line. In the phase-out band, every $1,000 of income costs $200 of deduction. Retirement and HSA contributions, and the timing of a Roth conversion or capital gain, all move MAGI — and there they move it with unusual leverage.
• The financing structure decides it. Paying cash forgoes the deduction entirely, and so does a HELOC or personal loan. Not a reason to borrow if you would rather not, but worth knowing first.
• Earlier is worth more, and keep any refinance clean. The window closes after 2028 and interest is front-loaded. On a refinance: no cash out, no rolled-in negative equity, first lien stays on the same car.
• Do not buy a car for the deduction. On an average loan it is worth roughly $1,500 over three years. That is a rebate on a decision you were already making.

By Arash Navi, CFA®, CPA, CFP® | Senior Wealth Manager

BFSG does not sell cars or auto loans. We look at a purchase like this alongside the rest of your financial picture — to ensure you are taking advantage of recent tax changes to minimize your taxes and keep more of your hard-earned cash.

If you bought or financed a vehicle in the last two years, or you are about to, that is worth a short conversation before the paperwork is signed. Reach out and we will be happy to walk through it with you.

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Sources

• IRS Fact Sheet FS-2025-03, “No Tax on Car Loan Interest”
• Treasury and IRS finalize the car loan interest deduction (TD 10054, September 8, 2026)
• Proposed regulations REG-113515-25, Federal Register
• Experian: auto loan rates and financing, Q2 2026
• NHTSA VIN Decoder