WASHINGTON— Treasury Secretary Scott Bessent formally announced the implementation of the “No Tax on American Car Loan Interest” rule he said is designed to ease the financial burden on U.S. car buyers by allowing them to deduct the interest they pay on auto loans from their federal taxable income.
The new guidance stems from tax legislation enacted last year and takes effect for the 2025 tax year.
Bessent, who also serves as acting IRS commissioner, said the provision will let eligible taxpayers deduct up to $10,000 a year in interest paid on loans for new vehicles assembled in the United States. The change applies to purchases made between Jan. 1, 2025, and Dec. 31, 2028. The Treasury Department and IRS released proposed rules explaining eligibility criteria and how taxpayers can claim the deduction on their 2025 returns.
As the CU Daily reported here, the Internal Revenue Service has issued a proposed rule on auto loan interest deduction provisions in HR 1, the budget reconciliation bill passed earlier this year, and also offered some additional clarity in response to questions from credit unions, among others. But while the clarity was welcomed, a new review of the proposal suggests it may place additional burdens on lenders, according to America’s Credit Unions.
‘Money Back in Pockets’
“This is about putting money back in the pockets of working and middle-class families,” Bessent said in a post on X (formerly Twitter). “For many Americans, a car isn’t a luxury — it’s essential for getting to work, school and childcare. This tax break helps make that cost more manageable.”
Under the rule, only interest on new, U.S.-assembled vehicles qualifies, and the deduction is available whether a taxpayer itemizes or uses the standard deduction. To qualify, vehicles must be purchased for personal use and not for commercial purposes.
Tax experts told numerous media outlets the provision could lower the overall cost of auto ownership, particularly for buyers in lower and middle-income brackets who rely on financing. However, the benefit phases out for higher earners, with limits tied to modified adjusted gross income.
As the CU Daily has been reporting, the tax break is part of the broader One Big Beautiful Bill Act signed into law in July 2025, which includes other individual tax provisions such as expanded deductions for overtime and tip income and enhanced benefits for seniors.
Tax Processing to Begin Soon
The IRS plans to begin processing tax returns for the 2025 tax year on Jan. 26, 2026, and taxpayers will use new forms to claim the car loan interest deduction along with other recently enacted tax changes.
Bessent said Treasury and the IRS will provide additional guidance and resources to help taxpayers and lenders navigate the new rules during the upcoming filing season
