Are Car Loan Payments Tax Deductible?

Whether car loan payments are tax deductible depends on how the vehicle is used. For most personal use cases, car loan payments generally do not qualify for a tax deduction.

Personal Car Loan Payments and Deductibility

For vehicles used solely for personal transportation, neither the principal nor the interest portion of a car loan payment is deductible. This is because tax law generally does not permit deductions for personal expenses, and car loan repayment is considered a personal expense.

This non-deductibility applies to all personal vehicle loan payments. The Internal Revenue Service (IRS) categorizes interest on personal car loans as non-deductible personal interest. Therefore, even if you pay a significant amount in interest, these amounts cannot be used to reduce your taxable income if the vehicle is for personal use.

Business Use and Car Loan Interest Deductions

An exception to non-deductibility arises when a vehicle is used for business purposes. Self-employed individuals, independent contractors, and small business owners may deduct certain vehicle-related expenses, including a portion of their car loan interest. This deduction is permissible because these expenses are considered “ordinary and necessary” for conducting their trade or business, as defined by IRS guidelines. An ordinary expense is common and accepted, while a necessary expense is helpful and appropriate.

For business use, only the interest portion of the car loan payment is deductible, not the principal. Principal repayment reduces the loan balance and is not a business expense. Interest paid on money borrowed for business activities is an allowable expense.

Taxpayers have two methods for deducting vehicle expenses for business use: the standard mileage rate method or the actual expenses method. If the standard mileage rate is chosen, taxpayers deduct a set amount per mile driven for business, which for 2025 is 70 cents per mile. This rate covers operating costs like depreciation, fuel, and repairs, meaning car loan interest cannot be separately deducted.

Alternatively, the actual expenses method allows taxpayers to deduct a proportionate share of all vehicle-related costs, including fuel, oil, repairs, insurance, registration fees, depreciation, and car loan interest. The deductible amount is proportional to the percentage of time the vehicle is used for business. For example, if a vehicle is used 60% for business, then 60% of the annual car loan interest paid can be deducted. This method requires detailed record-keeping of all expenses and mileage.

Understanding Other Vehicle-Related Deductions

While car loan deductibility primarily applies to business use, other vehicle-related expenses can be deductible in specific, limited scenarios. These deductions are distinct from loan payments and are typically not tied to the principal or interest of a car loan, unless qualifying under the actual expenses method for business use.

Mileage driven for qualified charitable organizations can be deducted at an IRS-set rate of 14 cents per mile for 2025. This deduction applies to vehicle use for volunteer work, such as transporting goods or people for a charity, and does not relate to car loan payments.

Mileage incurred for medical appointments or treatments may also be deductible. The IRS allows a deduction for medical mileage at 21 cents per mile for 2025. This applies to travel to and from medical care facilities. Like charitable mileage, this is a per-mile deduction not connected to car loan principal or interest.

Another potential deduction is for state and local sales tax paid on a new or used car purchase. If a taxpayer itemizes deductions on Schedule A, they may deduct the state and local sales tax paid, up to an annual limit of $10,000 ($5,000 for married individuals filing separately). This limit applies to the total of state and local income, sales, and property taxes combined. This is a one-time deduction in the year of purchase, not an ongoing deduction related to car loan payments.

Essential Documentation for Vehicle Deductions

Accurate record-keeping is important for substantiating any vehicle-related tax deductions. The IRS requires detailed records to support claims, especially for business use. Failing to provide adequate documentation can result in the disallowance of deductions during an audit.

For all deductible vehicle use, including business, charitable, or medical purposes, a mileage log is necessary. This log should include the date, destination, purpose, and starting and ending odometer readings for each journey. Digital applications or manual logs can track this information consistently throughout the tax year.

If using the actual expenses method for business vehicle deductions, maintaining detailed records of all related costs is important. This includes receipts for fuel, oil changes, maintenance, repairs, insurance, and vehicle registration fees. Each receipt should show the date, vendor, and amount.

For those deducting car loan interest under the actual expenses method for business use, annual interest statements from the lender are necessary. These statements provide the total interest paid during the tax year. Retaining vehicle purchase or lease agreements can also prove ownership or usage details. Diligent record maintenance ensures compliance and supports deductions claimed on a tax return.