Auto Loan Tax Deductions in 2025: What You Need to Know

Whether you’re considering a new vehicle purchase in Indiana or planning to buy a used one, knowing about potential tax benefits can help you make informed financial choices. Today, we explore the current landscape of the USA auto loan tax deductions, expected changes in 2025, and how these deductions might benefit you.

The basics of auto loan tax deductions in Indiana

The US auto loan tax deductions allow some taxpayers to deduct the interest paid on their car loans from their taxable income. This can lower the overall cost of financing a vehicle. However, eligibility for these deductions often grounded on several factors, including the purpose of the vehicle (personal or business), particular state legislation nuances, and the type of auto purchased.

Personal vs. business use

For most people, car loan interest isn’t deductible unless the auto is used for commercial purposes. If you use your vehicle primarily for work, you can request to deduct a portion of the interest on your auto loan. For instance, self-employed individuals often deduct expenses related to their vehicles, including interest payments.

Car loan interest deductions under the 2025 Trump Tax Law

The 2025 Trump Tax Law, also known as the One Big Beautiful Bill Act, introduces a significant change: car loan interest is now deductible under certain conditions. Here’s what you need to know.

Eligibility criteria

Not all car loans qualify for this deduction. To be eligible, the loan must be for a new vehicle—used cars do not qualify. Additionally, the vehicle must be intended for personal use. Both electric and gasoline-powered autos are included, covering a range of options like cars, SUVs, minivans, pickup trucks, and motorcycles. Importantly, the vehicle must have undergone its final assembly in the U.S.

Timing of the loan

The loan must be originated at the time of purchase after December 31, 2024. This means refinancing an existing loan taken out before January 1, 2025, won’t qualify. Similarly, taking out a new loan on a vehicle you already own outright does not count. If your mortgage meets the qualifications, refinancing will still be eligible, but the new loan amount cannot exceed the outstanding balance of the previous loan—no cash-out refinances are allowed.

Reporting requirements

Banks and financing companies will need to report the interest you paid on qualifying loans to both you and the IRS at the end of the year. This process will be similar to how mortgage interest is reported on Form 1098. You’ll need this information to claim your tax deduction when filing your taxes.

Income limits

You can deduct up to $10,000 in car loan interest if your Adjusted Gross Income (AGI) is $100,000 or less ($200,000 or less for married couples filing jointly). The deduction phases out by 20% as your income approaches $150,000 (or $250,000 for married couples filing jointly). Those who file separately are still eligible for this deduction.

Temporary deduction period

If your car purchase, timing, and income meet the criteria, you can deduct car loan interest up to the specified limit each year from 2025 to 2028. For example, if you buy a new car in 2026, you’ll have only three years left to take advantage of this deduction.

Remember, this is a tax deduction, not a tax credit. For instance, if you deduct $2,000 in car loan interest, it reduces your taxable income by that amount, potentially lowering your federal tax bill depending on your tax bracket.

This deduction applies regardless of whether you itemize or take the standard deduction. However, it won’t lower your AGI or help you qualify for other tax deductions or credits.

Other auto loan tax deduction changes in 2025

Several changes in tax legislation can impact auto loan deductions in 2025:

1. Standard deduction adjustments: The standard deduction is expected to increase slightly in 2025. This change could influence whether taxpayers choose to itemize their deductions, including auto loan interest.
2. Incentives for electric vehicles: With the focus on sustainable energy and electric vehicles (EVs), there may be enhanced tax incentives for EV purchases. These incentives could include deductions or credits designed to decrease the cost of financing electric vehicles.
3. Potential changes in commercial use deductions: Discussions are ongoing about simplifying the tax code for businesses, which may lead to adjustments in how vehicle expenses are deducted. If passed, these changes could make it easier for small business owners to claim auto loan interest as a deductible expense.

State-level deductions: Some states offer their own tax deductions or credits for vehicle purchases. In 2025, it’s important to monitor local legislation that could affect your ability to claim deductions based on where you live. Indiana will conform to the 2025 federal auto loan interest deduction for purchases made throughout the entire year, including those earlier in 2025. The deduction is retroactive and applies to any qualifying vehicle purchased and financed with a new loan originated on or after January 1, 2025, as specified by the new federal law and confirmed by explanatory materials on Indiana dealership and tax information sites.

How to maximize your auto loan tax deductions

In summary: If the new car was acquired and financed at any point during 2025 and meets all the criteria (new, U.S.-assembled, personal use), Indiana allows the same interest deduction as the IRS, even for purchases made before the law was finalized.

To get the most out of your potential auto loan tax deductions in 2025, consider these strategies:

Keep detailed records

If you use your vehicle for business, maintain thorough records of all related expenses. This includes mileage logs, fuel costs, maintenance expenses, and loan interest payments. Organized documentation will help substantiate your claims come tax season on both federal and Indiana state returns.

Consult a tax professional

Tax laws are subject to change. If you need personalized advice based on your situation, consult with a tax professional to get help in navigating the up-to-date regulations.

Explore electric vehicle incentives

If you’re thinking about purchasing an electric vehicle, stay informed about available tax credits or deductions. These incentives can significantly reduce your overall financing costs and may even apply to used EVs.

Review your financing options

When shopping for an auto loan, compare different lenders and financing options. Some lenders may offer special terms that align with potential tax benefits. To collect details from 25+ credit unions in one place, ask our advisers at the Indy Auto Man financial department.

F.A.Q.

1. Can I deduct auto loan interest in Indiana if I use my car for personal reasons?

You can deduct auto loan interest if your vehicle qualifies under the 2025 Trump Tax Law. In other cases, personal auto loan interest is not deductible unless the vehicle is used primarily for business purposes. Eligible taxpayers who purchase qualifying vehicles earlier in the year will not need to take extra steps, as the conformity is automatic once Indiana updates its annual Internal Revenue Code reference with retroactive effect, which is standard for Indiana tax law.

2. Are there specific tax credits for electric vehicles in 2025?

Yes, there are likely to be enhanced tax credits for electric vehicle purchases in 2025 as part of ongoing efforts to promote sustainability.

3. How do I know if I should itemize my deductions?

If your total deductible expenses exceed the standard deduction for your filing status, itemizing your deductions may turn out beneficial. Consult with a tax professional for guidance.

4. What records should I keep for business-related vehicle expenses?

Keep a detailed log of your mileage, fuel costs, maintenance expenses, and any interest paid on your auto loan. This documentation is crucial for substantiating your deductions.

5. Will state-level deductions affect my federal tax return?

State-level deductions typically do not directly affect your federal tax return; however, they can influence your overall tax liability. It’s important to consider both state and federal implications when filing your taxes.

Whether you’re eyeing a new electric vehicle or a reliable used car from Indy Auto Man, understanding these tax implications will empower you on your car-buying journey.  If you have any doubts or questions, feel free to address our finance department.