Can I Deduct the Interest Paid on Car Loan?

Car loan interest is generally not tax deductible.

As is specifically stated in the IRS Tax Topic 505 discussion of "Interest Expense," interest paid on car loans for personal use, as opposed to business use, is not tax deductible. Car loan interest for personal autos is considered "personal interest," which is a category of nondeductible expense.

Basics

According to Cars Direct, tax deductible interest expenses include: "mortgage or home equity payments, student loan payments, business loan payments and payments for specific types of personal loans."

Considerations

While conventional car loans do not fit the criteria for tax deductions, you can finance your auto purchase in ways that allow for deductible interest. Home equity loans or lines of credit, secured with real property, do have tax deductible interest and can often be used for an auto purchase. Additionally, if you use your auto primarily for business purposes, it could be considered a business expense.

Tax Deductions

Exploring other options to make auto financing tax deductible is wise since it can save you money on tax obligations. You should keep your sales and financing records when buying a car as it has been rumored during the economic downturn (2007-2010) that the IRS is contemplating new tax rules to make auto loan interest and sales tax both deductible as part of stimulus programs.

References

• IRS: Topic 505 - Interest Expense
• Cars Direct: Is Car Loan Interest Tax Deductible?