CPA Sample Client Letter: Deduction for Car Loan Interest.

(Parker Tax Publishing October 2025)

Dear [Client],

After a 35-year hiatus, the deduction for personal car loan interest is back in the federal tax code, thanks to some new rules in the "One Big Beautiful Bill."

The new tax break comes with a few limitations, though. For instance, it's only available from 2025 through 2028 for loans taken out after December 31, 2024, it only applies if your loan is used to buy certain motor vehicles for personal use, and it's limited to $10,000 per year.

The deduction is allowed regardless of whether you itemize your deductions or take the standard deduction. However, it's gradually phased out if your adjusted gross income exceeds $100,000 ($200,000 in the case of a joint return).

Qualifying Vehicles

For the interest to be deductible, the loan must be for the purchase of a qualifying motor vehicle (officially, an "applicable passenger vehicle"). Several requirements must be met for a vehicle to qualify. For instance, the vehicle must:

Be new.

Manufactured primarily for use on public streets, roads and highways.

Be either a car, minivan, van, sport utility vehicle, pickup truck or motorcycle.

Have a gross vehicle weight rating of less than 14,000 pounds.

Be treated as a motor vehicle for purposes of the Clean Air Act.

Have its final assembly in the U.S.

Final Assembly in the U.S. To determine any vehicle's assembly location, go to https://vpic.nhtsa.dot.gov/decoder/ and put in the vehicle's VIN and model year. The last item under "Other Information" is the final assembly plant's location.

Qualifying Loans

For car loan interest to be deductible, the loan must have been taken out after December 31, 2024, and be secured by the first lien on the vehicle. The loan cannot be from a related party such as a family member.

If a qualifying loan is later refinanced, interest on the new loan is generally deductible, but only to the extent the amount of the new loan does not exceed the old one.

Phaseout of Deduction Based on Income

The deduction for personal car loan interest is reduced by 20% of the amount by which your modified adjusted gross income exceeds $100,000 ($200,000 in the case of joint filers).

If you'd like to discuss the new deduction for car loan interest, please don't hesitate to call.

Sincerely,

[Your Name, Your Firm]

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com