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Is the Interest Paid On a Car Loan Tax Deductible?

written by: Bobby Ivie•edited by: Rebecca Scudder•updated: 12/24/2010

Trying to figure out tax deductions can be a real headache. But paying more than your fair share can, too. For example, can the interest paid on a car loan be deducted on income tax returns? Not sure? Read on and learn.

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    yellow car We all love our country, but when it comes time to pay Uncle Sam, all of us want a break. Fortunately, the IRS has given us breaks in the form of tax deductions. Some of these deductions include interest paid on loans, such as home loans. However, is the interest paid on a car loan tax deductible?

    The IRS allows for interest deductions on certain kinds of loans, but not all of them. A home loan is a good example. U.S. citizens paying a mortgage can deduct the interest on their primary residence or a second home. However, there may be some stipulations of which taxpayers should inform themselves.

    At this time, investment interest is also tax deductible. Investment interest is that paid on loans for investment property. Likewise, students can deduct the interest they pay on school loans. So what about other loans such as those for credit cards and cars?

    Looking at which interest is tax deductible and which is not makes it apparent that the government is providing incentives for taxpayers. By allowing deductions for mortgage loans, they are offering incentives to potential homebuyers. By providing deductions for the interest paid on school loans, they are offering incentives to potential students.

    However, the IRS does not allow interest deductions for personal loans. According to them, credit cards fall into the category of personal loans; therefore, there is no tax break for them. The same rule applies to installment loans. With that in mind, are they personal loans, or is the interest paid on a car loan tax deductible?

    You may be able to deduct the car loan interest if you have a qualifying home-based business. However, as far as your personal finances are concerned, car loan interest is not deductible at this time. Car loans fall into the category of installment loans. However, there may be other ways to go about saving that same money.

    Indirect ways to deduct the interest on a car loan are to pay for the car by taking out a second mortgage, getting a home equity loan, or obtaining a line of credit against a home. However, a homeowner must be very careful in these situations; he could lose the home if he defaults on the loan.

    Everyone should always do his own due diligence. Laws can change every year, as can personal financial situations. IRS publications and good accountants are able to keep taxpayers up to date.

    Even though the interest paid on a car loan is not tax deductible directly, the best thing anyone can do is think a happy thought while paying income taxes to Uncle Sam. It could be worse: Just be glad he's your Uncle, not your Dad.

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