Some people who’ve bought a new car recently might be eligible for up to a $10,000 deduction on their federal taxes.

As part of the ‘One Big Beautiful Bill’ passed by Congress early last year, a federal tax deduction was made available to people who’ve financed the purchase of a new car or motorcycle that was made in the United States. The IRS is still working through the rulemaking process, but their draft regulations have been made available and public comment closes on Feb. 2.

The deduction is up to $10,000 per tax year, and will match the value of whatever the taxpayer paid in interest on a loan for a vehicle for personal use in that year. The terms do not apply to vehicles purchased for work use.

The taxpayer has to have initiated the loan after Dec. 31, 2024 and the deduction will be available through 2028 under the current law. The rules are fairly specific; perhaps the biggest restriction is that the car has to have been made in the United States, at least for final assembly. To prove that, taxpayers will be asked to provide their Vehicle Identification Number on their tax returns.

The Monroney sticker, the large window sticker that lists all the details of a new car that is required by federal law, will list the vehicle’s final assembly point clearly under the ‘parts content information’ section, as well as the country of origin for its major mechanical components. The National Highway Traffic Safety Administration maintains a VIN lookup tool that can also provide that information, which can be found at wdt.me/VINLookup.

Other qualifications include a requirement that the loan must be secured by a lien on the vehicle it’s relevant to, and cannot be a refinanced loan. It has to be issued by a legitimate lender or dealership, and it must be an interest-bearing loan in the year the deduction is being sought; loans with terms of zero interest will only become eligible once the interest starts to accrue.

The IRS is in the process of drawing up the new forms required for this credit now. In the meantime, lenders are required to send their customers a statement with the total amount of interest paid on a qualified vehicle loan by Saturday. The taxpayer will include that information on their Schedule 1-A form when filling out their 2025 federal income tax return, which is due by April 15 of this year.

The deduction only works for new cars; previously owned vehicles are not eligible. Income restrictions are also in place; the deduction starts to phase out for single taxpayers who report more than $100,000 in modified adjusted gross income per year, or joint filers who report more than $200,000. The deduction is cut by $200 for every $1,000 earned above those levels.

Once put into place, taxpayers who claim the standard deduction and people who itemize their deductions will be able to apply for the credit. The standard deduction is $15,750 for individual filers and $31,500 for married joint filers this tax year.

Tax deductions lower the total taxable value of an individual’s income for the year, lowering the person’s overall tax burden. It’s different than a tax credit, which provides a specific dollar-for-dollar reduction of the individual’s tax burden.

According to automotive services and research group Cox Automotive, this deduction isn’t expected to really drive much new car purchasing. The group’s interim chief economist Jeremy Robb said that this isn’t a new concept, and has been done before.

“The idea of making auto loan interest tax deductible is not new; it was allowed before the Tax Reform Act of 1986. And the new rules can indeed benefit many buyers of new U.S.-assembled vehicles, as the administration notes,” he said.

Robb said about 50% of vehicles sold in the U.S. are finished in the country, and the fact that both standard deduction-takers and those who itemize will be able to receive it means it applies to a fairly broad category of people. But he said the actual financial benefits for each taxpayer are modest at best.

“A typical auto loan today — 72 months, 9.5% APR, on a $48,000 vehicle (the average price of a new vehicle) with 12.5% down — results in about $3,800 in interest in the first year;$3,200 in the second year. Interest drops to $2,600 in year three and declines from there,” he said. “If we assume the average federal tax rate ranges from about 15% to 20% for new-vehicle buyers, the first-year deduction — the largest during the life of a loan — would be less than $750. In the second year, the deduction will result in about $640 in savings on taxes. While all savings are a benefit to consumers, this tax credit alone is unlikelyto be a big motivator for new car buyers. A $40,000 vehicle over a similar 60-month loan: First year deduction would be less than $600.”

It’s expected to cost the federal government over $57 billion in lost revenue in exchange, according to analysis from the Congressional Joint Committee on Taxation.

Robb said there may be other benefits driven by this deduction though; because it reduces adjusted gross income, it could help taxpayers near the income limits for other deductions or tax credits to qualify for them. That could include the federal student loan interest deduction or health savings account contribution deductions.

“In the end, the new tax policy may reduce the number of cash buyers (as there is some offset for taking out a loan now), but even then, that result will benefit lenders and banks (more loans) more than it will benefit consumers,” he said. “Overall, any incentive for new-vehicle buyers is welcome, but this tax credit is limited, won’t be a market mover, nor is it a tool to substantially address the affordability challenges and high interest rates our market faces.”