Can I Deduct Auto Loan Interest on My Taxes?

Auto loan interest refers to the cost of borrowing money to purchase a vehicle. Many individuals inquire whether this interest can be deducted on their tax returns. The ability to deduct auto loan interest depends significantly on how the vehicle is used, with distinct rules applying to personal versus business purposes.

Auto Loan Interest for Personal Use

Generally, interest paid on a loan for a personal vehicle is not tax deductible. This contrasts with other types of interest, such as certain home mortgage interest or student loan interest, which have specific provisions allowing for deductibility.

A personal vehicle is considered a personal asset, and its associated expenses, including loan interest, are viewed as personal living expenses. The Internal Revenue Service (IRS) typically allows deductions for expenses that are ordinary and necessary for earning income, not for personal consumption.

However, a new, temporary deduction for personal use vehicle loan interest has been introduced for vehicles purchased after December 31, 2024, and applies through 2028. This deduction is limited to $10,000 per year and requires the vehicle to be new, for personal use, and have its final assembly point in the United States. It also phases out for individual taxpayers with modified adjusted gross income over $100,000, or $200,000 for those filing jointly.

Deducting Auto Loan Interest for Business Use

When a vehicle is used for business purposes, the interest paid on its loan can be a deductible expense. This applies to self-employed individuals, independent contractors, and small business owners who use their vehicle to generate income. The deduction is limited to the portion of interest directly attributable to the vehicle’s business use.

To determine the deductible amount, taxpayers must calculate the percentage of miles driven for business compared to total miles driven. For example, if a vehicle is used 70% for business, only 70% of the auto loan interest can be deducted. This requires meticulous record-keeping, including a mileage log detailing the date, destination, purpose, and miles driven for each business trip.

Taxpayers can choose between two methods for deducting vehicle expenses: the standard mileage rate or the actual expense method. If opting for the actual expense method, which includes auto loan interest, detailed records of all vehicle-related costs such as fuel, repairs, insurance, and depreciation are necessary. The standard mileage rate, which is 70 cents per mile for business in 2025, accounts for many vehicle costs, but auto loan interest is generally included only under the actual expense method.

For self-employed individuals, these deductible expenses, including the business portion of auto loan interest, are reported on Schedule C (Form 1040), Profit or Loss From Business. The interest is typically entered on the “Other Interest” line on Schedule C. Accurate records are crucial to substantiate the deduction in case of an IRS inquiry. This documentation should include loan statements showing interest paid, as well as detailed mileage logs and receipts for other actual expenses if that method is chosen.

Other Situations and Common Misunderstandings

Several other scenarios exist regarding auto loan interest deductibility. One frequent misconception involves using a home equity loan to purchase a vehicle. Under current tax law, interest on home equity loans is only deductible if the loan proceeds are used to buy, build, or substantially improve the taxpayer’s home. Therefore, using a home equity loan to acquire a car typically makes the interest non-deductible, as it does not meet the “acquisition indebtedness” criteria for home-related expenses.

Interest might be deductible if the vehicle is directly used in an investment activity that generates taxable income, such as operating a car rental business. This is a narrow exception and does not apply to driving a personal vehicle to check on personal investments. The borrowed money must be used to buy property that will produce investment income or appreciate in value.

Individuals who use their vehicles for charitable purposes can deduct mileage at a specific rate set by the IRS, but the interest on an auto loan for that vehicle is not deductible. For 2025, the charitable mileage rate is 14 cents per mile. Taxpayers can also deduct actual gas and oil costs for charitable driving, but general vehicle expenses like repairs, insurance, or loan interest are not included in this charitable deduction. This deduction is claimed on Schedule A (Form 1040) as an itemized deduction. Similarly, unreimbursed employee expenses, including auto loan interest for work-related driving, are generally not deductible for most employees through 2025, with limited exceptions for certain professions.