Taxpayers who buy a new car assembled in the U.S. may be able to deduct up to $10,000 on their tax returns beginning in 2025. The IRS has now issued additional guidance in the form of Proposed Regulations to help taxpayers understand the new car loan interest deduction under the One Big Beautiful Bill Act (OBBBA).

The new deduction for car loan interest is temporary and applies to the tax years 2025 through 2028.

Here’s what you need to know.

For purposes of the deduction, a qualified passenger vehicle is a car, minivan, van, SUV, pick-up truck, or motorcycle with a gross vehicle weight rating of less than 14,000 pounds and that has undergone final assembly in the United States.

You can determine where a vehicle was final assembled by checking the vehicle’s information label or using the Vehicle Identification Number (VIN). By law, every vehicle has a VIN displayed on a dashboard sticker or plaque. The 17-digit VIN is a unique combination of numbers and letters that identifies your vehicle. A VIN starting with 1, 4, or 5 typically indicates the vehicle was made in the U.S. Cars made in Canada start with a 2, and vehicles made in Mexico start with a 3. Other countries are denoted with letters—those made in Asia use letters J through R, and those in Europe use letters S through Z.

(Keep in mind that parts are often sourced from many countries, and the cars may then be produced in other countries, so double-check before you buy to make sure the car qualifies.)

To qualify for the deduction, the interest must be paid on a loan that originates after December 31, 2024, to purchase a vehicle (leased vehicles do not qualify). The vehicle's original use must start with you (used vehicles do not qualify). The deduction applies to interest paid on a loan for a personal use vehicle (not for business or commercial use) and must be secured by a lien on the vehicle.

You can deduct interest up to the $10,000 cap. Keep in mind that this is a deduction for interest paid, not the total car payment.

Here’s what that math might look like. Let’s assume that you buy a $50,000 car in 2026 (that’s pretty standard these days) at 6% APR over five years (many buyers qualify at around 6% for a loan, but your rate could vary depending on the amount and your credit rating).

That works out to monthly payments of $966.64 and a total interest cost of $7,998.40 over all years. In the first year, the deductible interest is $2,880.

Please don’t. I’m a big proponent of taking advantage of tax breaks to cut costs, not to rack up new expenses. If you are already thinking about buying a new car, consider whether it would result in a deduction. But if you’re asking whether it’s worth it to........

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