Taxpayers could hit a dead end with car loan interest deduction

Core Points - The new tax deduction for car loan interest applies only to new cars assembled in the United States, excluding leases and used car loans [10][12][14] - The deduction allows taxpayers to deduct up to $10,000 in car loan interest, potentially resulting in tax savings ranging from $300 to $900 for many new car buyers [12][13] - Higher-income households may face limitations on the deduction, with phase-out thresholds set at $150,000 for single filers and $250,000 for joint filers [17][18] Group 1: Tax Deduction Eligibility - The car loan interest deduction is only available for loans on new cars with final assembly in the U.S., and it does not apply to leases or used car loans [10][14] - Taxpayers must include the Vehicle Identification Number (VIN) on Schedule 1-A to claim the deduction, and the VIN must be accurate [27][29] - The deduction is available for tax years 2025 through 2028, but it may not cover the entire duration of a car loan [14][16] Group 2: Leasing and Financing Trends - Leasing is particularly popular in states like Michigan, where nearly 53% of new vehicles sold in Q3 2025 were leased, compared to 5% or fewer in states like Alaska and Arkansas [3][4] - Many consumers are trading in vehicles with negative equity, which complicates the deduction process as interest on negative equity rolled into new loans is not deductible [20][22] - The average amount owed on upside-down loans reached a record $6,905 in Q3 2025, indicating a growing trend of negative equity among new car buyers [23] Group 3: Documentation and Compliance - Taxpayers should prepare documentation early, including original loan agreements and interest statements, to facilitate claiming the deduction [26][34] - Lenders are expected to provide a vehicle loan interest statement (1098-VLI) starting in 2026, but for 2025, this is optional [32][33] - Proof of personal use of the vehicle is required to claim the deduction, with more than 50% of the expected use needing to be personal [36]