The Internal Revenue Service (IRS) has issued formal guidance on a sweeping new tax deduction for car loan interest, affecting millions of drivers across the United States.
This change stems from the "No Tax on Car Loan Interest" provision in the One Big Beautiful Bill Act, signed into law by President Donald Trump on July 4, 2025. It could increase tax refunds for eligible Americans in the 2026 filing season and marks a significant adjustment in federal tax policy designed to make American-made vehicles more affordable for personal use.
The new car loan interest deduction applies to interest paid on loans taken out after December 31, 2024, for the purchase of new, U.S.-assembled vehicles intended for personal use, according to an IRS release.
It enables taxpayers to write off up to $10,000 annually in interest paid on qualified new vehicle loans, potentially boosting average tax refunds and reshaping the car purchasing landscape nationwide.
However, the rules are complex, income-limited and exclude many commonly financed vehicles, such as used and leased cars.
To qualify, the vehicle must meet the following requirements:
- Vehicles purchased used, leased or for commercial purposes are not eligible.
- The IRS guidance also clarifies that taxpayers can claim the deduction regardless of whether they itemize or take the standard deduction, simplifying access for many filers.
- Certain lenders are required to report interest paid by borrowers to the IRS and provide this information to taxpayers, streamlining the claiming process.
Most eligible taxpayers are expected to see savings of a few hundred dollars in the first year, with the overall cost of the provision estimated at $31 billion over the next decade, the auto-focused outlet CBT News reported.
Lower-income households, more likely to purchase used vehicles, may find themselves excluded from the benefit.
White House National Economic Council Director Kevin Hassett said in an interview with Fox Business on December 18: "We are going to see the biggest refund cycle ever in the history of America, and people are going to get massive refund checks."
The Treasury and IRS have invited the public to comment on the proposed regulations through February 2, saying in a news release, "Comments can be submitted through Regulations.gov, and instructions can be found in the proposed regulations."
Taxpayers can claim the new deduction when filing their 2025 tax returns in 2026.
The IRS is expected to finalize its start date for the 2026 tax season in early January. Early filers should be aware that tax refunds may be delayed as households determine their eligibility for new deductions and gather the necessary documentation.