Each week, in our Ask the Editor series, Joy Taylor, The Kiplinger Tax Letter Editor, answers questions on topics submitted by readers. This week, she’s looking at four questions on the new tax deduction for paying interest on vehicle loans. (Get a free issue of The Kiplinger Tax Letter or subscribe.)
1. What are the general rules for the deduction?
Question: I hear that individuals can now deduct interest paid on their car loans. Can you explain this tax break?
Joy Taylor: The “One Big Beautiful Bill” law that was enacted on July 4 provides several new tax breaks for individuals. One of those is the up-to-$10,000 deduction for interest paid on loans to buy a new vehicle for personal use. This deduction is temporary, first taking effect on 2025 tax returns that you file next year, and ending after 2028. It is available to people who itemize on Schedule A of Form 1040 and to filers who claim standard deductions. This is a “below-the-line” deduction, meaning it is subtracted from adjusted gross income to arrive at taxable income.
The write-off begins to phase out at modified adjusted gross income (MAGI) over $200,000 on joint returns and $100,000 on other returns, and ends at MAGI of $250,000 on joint returns and $150,000 on others.
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Interest paid on the purchase of a new qualified passenger vehicle is eligible for the deduction. A qualified passenger vehicle is a car, minivan, van, SUV, motorcycle or pickup truck with a gross vehicle weight rating of less than 14,000 pounds that is bought for personal use. Also, the vehicle’s final assembly must take place in the United States. You must purchase the vehicle in 2025 or later, and you cannot deduct interest paid on a loan to buy a used vehicle.
The lender must generally file an information return with the IRS, reporting the amount of interest received from the buyer of the car and send a copy to the purchaser. The IRS is providing some transitional relief from this reporting rule. For the 2025 year, the business receiving the car loan interest may satisfy its reporting obligations by making a statement available to the car buyer stating the total amount of interest received on a qualified passenger vehicle loan. This can be provided on an online portal, in a monthly statement or annual statement given to the buyer, or something similar.
This relief gives lenders extra time to comply with the normal reporting obligations and lets the IRS make necessary program changes and updates to its tax forms, while also giving car buyers the information they need to claim the new deduction.
2. What is MAGI?
Question: I know the deduction for interest paid on car loans begins to phase out at MAGI over a certain amount. What is the definition of MAGI for this deduction?
Joy Taylor: As stated above, the tax break begins to phase out at MAGI over $200,000 on joint tax returns and $100,000 on other tax returns, and ends at MAGI of $250,000 on joint tax returns and $150,000 on other tax returns.
MAGI is often used by the IRS to determine your eligibility for certain tax benefits or tax breaks, or to determine whether you are subject to surtaxes or surcharges. True to the complexity of the federal tax code, the definition of MAGI often differs, depending on what it is used for.
MAGI for this purpose is your adjusted gross income shown on line 11 of your Form 1040 or 1040-SR, plus any foreign earned income exclusion, foreign housing exclusion, and certain excluded income received from sources in Puerto Rico, American Samoa, Guam or the Northern Mariana Islands.
3. Can I deduct interest on my 2023 car loan?
Question: I bought a new car in 2023 for personal use, and I took out a loan to finance the purchase. Will I be able to deduct the interest that I pay this year on my 2025 tax return that I file next year?
Joy Taylor: Unfortunately, no. To qualify for the deduction, you must purchase the vehicle in 2025 or later. Since you bought the vehicle in 2023, you cannot deduct the interest that you pay on the car loan in 2025 or in later years.
4. How do I report this on my tax return?
Question: I bought a new car for personal use this past March, and I took out a loan to finance the purchase. How do I deduct the interest that I paid on the car loan on my 2025 Form 1040?
Joy Taylor: You would use new IRS Schedule 1-A to compute your MAGI and to calculate the amount of the car loan interest deduction. You would then transfer the deduction amount to line 13 of your Form 1040. Note that you will need to also put in the vehicle identification number on Schedule 1-A.
About Ask the Editor, Tax Edition
Subscribers of The Kiplinger Tax Letter, The Kiplinger Letter and The Kiplinger Retirement Report can ask Joy questions about tax topics. You’ll find full details of how to submit questions in each publication. Subscribe to The Kiplinger Tax Letter, The Kiplinger Letter or The Kiplinger Retirement Report.
We have already received many questions from readers on topics related to tax changes in the One Big Beautiful Bill and more. We will continue to answer these in future Ask the Editor round-ups. So keep those questions coming!
Not all questions submitted will be published, and some may be condensed and/or combined with other similar questions and answers, as required editorially. The answers provided by our editors and experts, in this Q&A series, are for general informational purposes only. While we take reasonable precautions to ensure we provide accurate answers to your questions, this information does not and is not intended to, constitute independent financial, legal, or tax advice. You should not act, or refrain from acting, based on any information provided in this feature. You should consult with a financial or tax advisor regarding any questions you may have in relation to the matters discussed in this article.