New Car Loan Interest Deduction: What You Need to Know to Save on Your 2025–2026 Taxes
- Alejandro
- 2 days ago
- 3 min read
Buying a new car is one of the most important financial decisions for many families and workers in the United States. While most people focus on the monthly payment, few understand how auto loan interest deductions work and who can actually benefit from them on their tax return.
In this article, we clearly and professionally explain when interest on a new car loan may be deductible, who qualifies, and how to take advantage of this benefit if you are self-employed or use your vehicle to generate income.
It Depends on How the Vehicle Is Used: When Is Auto Loan Interest Deductible?
The IRS general rule is simple:
Personal use of the vehicle: Loan interest is not deductible.
Business or self-employment use: Loan interest may be deductible, but only under specific conditions.
This means that purchasing a new car does not automatically guarantee a tax deduction. Everything depends on how the vehicle is used and your employment status.
How Much Can Be Deducted?
Up to $10,000 in interest paid during the tax year. This means you may deduct up to $10,000 of the total interest paid on a qualifying auto loan from your taxable income.
W-2 Employees: Can They Deduct Auto Loan Interest?
No. Even if an employee uses their car to commute, visit clients, or run errands for their employer, they cannot deduct auto loan interest.
Since the 2017 Tax Reform, unreimbursed employee expenses have been eliminated at the federal level through at least 2025.
Independent Contractors: Can Auto Loan Interest Be Deducted?
If you are self-employed, a 1099 contractor, business owner, or work in rideshare or service industries such as Uber, Lyft, DoorDash, cleaning, construction, landscaping, and similar fields, the interest on your new car loan may be deductible as a business expense.
However, important rules apply:
The vehicle must be used for business purposes. It does not need to be used 100% for business, but there must be real and verifiable business use.
Only the business-use portion is deductible. The IRS requires mileage records to determine the percentage of business use.
You must use the actual expense method. Loan interest is deductible only if you choose this method. If you use the standard mileage method, interest is already included in the per-mile rate and cannot be deducted separately.
Does the Vehicle Have to Be New?
For purposes of deducting interest as a business expense, it does not matter whether the vehicle is new or used.
What matters is:
There is a legitimate loan.
The taxpayer is legally responsible for the loan.
The vehicle is used in an income-producing activity.
That said, many taxpayers take advantage of purchasing a new vehicle to reorganize expenses and begin properly documenting business use.
What If the Vehicle Is Owned by a Business?
If the vehicle is titled under an LLC or corporation, the interest may be recorded directly as a business expense, provided that:
Business use is properly documented.
Mileage records are maintained.
Commercial interest deduction rules are followed (Section 163(J)).
Common Mistakes to Avoid
Assuming auto loan interest is deductible simply because the car is new.
Failing to keep mileage records.
Mixing personal and business expenses without control.
Using the standard mileage method and then attempting to deduct interest separately.
Claiming a business-use percentage without supporting evidence.
Income Limits
This deduction begins to phase out as income increases:
Single filers: Phase-out begins at a MAGI of $100,000
Married filing jointly: Phase-out begins at a MAGI of $200,000.
If your income exceeds higher thresholds (for example, over $150,000 for single filers or $250,000 for married couples), you may lose this benefit entirely.
How to Claim This Deduction on Your Tax Return
Although the IRS is still finalizing specific forms, the general process includes:
Gather your documentation:
Loan statement showing total interest paid during the year.
Vehicle VIN (Vehicle Identification Number) to verify U.S. assembly requirements.
Report the information on your Form 1040.
For tax years 2025–2028, the IRS will provide specific instructions on where to report this information (possibly in a new section or the appropriate schedule).
Adjust your AGI using this “above-the-line” deduction, when applicable.
Conclusion
A powerful deduction but only for those who qualify. The new car loan interest deduction can be a valuable tax tool for self-employed individuals and business owners, but it does not apply to personal use or W-2 employees.
If you use your vehicle to generate income, this deduction may help you:
Reduce your taxable income.
Increase your refund.
Optimize your business expenses.
At Professional Taxes, we help our clients determine the correct method (standard mileage vs. actual expenses), calculate business-use percentages, and apply this deduction safely and in full compliance with IRS regulations.
PROFESSIONAL TAXES LLC.
480-3430299
3162 E Roeser Rd. Phoenix, AZ. 85040
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