Car Loan Interest Deduction: Which Vehicles Qualify and How Much

Finance a $45,000 new pickup at 7% for 72 months and your payment comes to about $767 a month. In the first full year of payments, roughly $2,950 of that goes to interest. Under the car loan interest deduction created by the One Big Beautiful Bill Act in 2025, a buyer whose truck and loan both qualify can generally deduct that interest, whether or not they itemize. In the 22% federal bracket, a $2,900 deduction cuts the tax bill by about $640. In the 12% bracket, it is worth about $350.

That is real money, but the qualification rules are detailed, and many vehicles and loans do not make the cut. This guide works through the tests in the order that knocks out the most people, then shows the income phase-out math and exactly how the deduction is claimed. The example figures are illustrative. This is general education, not individual tax advice.

The basic rule in one paragraph

For tax years 2025 through 2028, you can deduct up to $10,000 a year of qualified passenger vehicle loan interest. The IRS describes it as available to both itemizers and non-itemizers, subject to a phase-out based on modified adjusted gross income. The interest must be paid on a loan you took out after December 31, 2024, to buy a new vehicle for personal use, the loan must be secured by a first lien on that vehicle, and the vehicle's final assembly must have occurred in the United States. The statute and the Treasury regulations, finalized in Treasury Decision 10054 and published in Internal Revenue Bulletin 2026-39, fill in the details.

Test 1: Is the vehicle new?

The vehicle's original use must begin with you. Used vehicles do not qualify, no matter how recent. Under the final regulations, original use begins with the first person who takes delivery after the vehicle is sold, registered, or titled. A dealer's demo generally still counts as new if the dealer never registered or titled it, and the regulations tie the question to whether the lender classified the vehicle as new in the loan documents.

Leases fail this test in practice and are excluded outright. Lease payments are not deductible as car loan interest, and if you buy your vehicle at the end of a lease, original use usually began with the leasing company, so the buyout loan typically does not qualify either.

Test 2: Was final assembly in the United States?

This is the test that surprises buyers, because it has nothing to do with the brand. A vehicle from a foreign automaker can qualify if it was assembled in a U.S. plant, and a vehicle from an American brand fails if it was assembled in Mexico, Canada, or elsewhere.

The proposed and final rules let you rely on either of two sources. The first is the plant of manufacture encoded in the vehicle identification number, which you can check with the National Highway Traffic Safety Administration's VIN decoder. The second is the final assembly point printed on the label attached to new vehicles at the dealership, often found on the window sticker. Check before you sign, since the same model can be built in more than one country depending on trim or year.

Test 3: Is it the right kind of vehicle?

The law covers a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle that is manufactured primarily for use on public streets, roads, and highways, has at least two wheels, is treated as a motor vehicle under the Clean Air Act, and has a gross vehicle weight rating under 14,000 pounds. That weight limit is generous enough to include nearly every passenger vehicle and most heavy-duty pickups. The final regulations removed narrower weight cutoffs in some proposed definitions so that SUVs and pickups up to the 14,000-pound limit are covered.

Vehicles built for off-road use only, trailers, and boats are not covered.

Test 4: Is the loan the right kind of loan?

Several loan rules apply. The loan must have been originated after December 31, 2024. A 2023 or 2024 loan does not qualify, even on a brand-new car. The debt must have been incurred to purchase the vehicle and must be secured by a first lien on it. An unsecured personal loan used to buy a car generally fails this test, as does a home equity loan.

The final regulations also address what can be included in the loan. Amounts customarily financed as part of buying the vehicle and directly related to it, such as taxes and dealer fees, can count. Negative equity rolled in from a trade-in does not count, because it relates to the old vehicle. If your loan includes nonqualifying amounts, interest is allocated proportionally.

Loans to finance fleet sales, commercial vehicles not used for personal purposes, salvage-title vehicles, and vehicles bought for scrap or parts are excluded. The statute also excludes debt owed to a related person, such as certain close family members, so a loan from a parent typically will not work.

Test 5: Is the vehicle for personal use?

The deduction is for personal-use vehicles. The regulations define personal use as use other than in a trade or business or for producing income, with an exception for driving done as an employee. If you are self-employed and deduct vehicle interest as a business expense on Schedule C, Schedule E, or Schedule F, you cannot deduct the same interest again here. The new Schedule 1-A has a separate column for interest already deducted on those schedules to prevent double counting.

What about refinancing?

Refinancing can preserve the deduction. If you refinance a qualifying loan into a new loan secured by a first lien on the same vehicle, interest on the new loan can qualify, but only up to the balance of the original loan at the time of the refinance. Taking extra cash out does not extend the deduction to the added amount.

The income phase-out, worked out

The deduction shrinks by $200 for every $1,000, or part of $1,000, by which your modified adjusted gross income exceeds $100,000, or $200,000 for married couples filing jointly. The final regulations confirm that the $100,000 threshold applies to every filing status other than married filing jointly, including head of household. For this purpose, MAGI is generally your adjusted gross income plus certain excluded foreign income.

Here is how the math works with about $2,900 of qualifying interest:

A single filer with MAGI of $104,200 is $4,200 over the threshold. Rounded up, that is five units of $1,000, and five times $200 is $1,000. The deduction falls from $2,900 to $1,900.

A single filer with MAGI of $118,000 is 18 units over, for a $3,600 reduction. That wipes out the full $2,900.

Because the reduction applies after the $10,000 cap, even the maximum deduction disappears entirely at $150,000 of MAGI for single filers and $250,000 for joint filers. In practice, the people who benefit most have moderate incomes and sizable loans.

The $10,000 cap and multiple vehicles

The cap is $10,000 per return per year, regardless of filing status, according to the final regulations. If you and your spouse each financed a qualifying new vehicle, your combined qualified interest is still limited to $10,000 on a joint return. Schedule 1-A has room for two VINs, with instructions for reporting more.

Most buyers will not hit the cap. Reaching $10,000 of annual interest takes a large balance at a high rate, a loan well above $100,000 at today's typical new-car rates. The Federal Reserve's G.19 release showed average 72-month new-car loan rates at commercial banks just under 7% in the second quarter of 2026.

How to claim it

The deduction is claimed on Schedule 1-A, Additional Deductions, which the IRS created for the four new deductions in the law. Part IV covers car loan interest. For each vehicle, you enter the VIN and answer two yes-or-no questions: whether the original use of the vehicle began with you, or your spouse if filing jointly, and whether final assembly occurred in the United States. The VIN is mandatory. The law and regulations say the interest is not deductible unless you report it.

The schedule then applies the $10,000 cap and the phase-out, and the total from Schedule 1-A flows to Form 1040, on line 13b of the 2025 form. Because the deduction is taken after adjusted gross income is calculated, it lowers taxable income but does not lower your AGI. Benefits that depend on AGI will not change.

Lenders now have reporting duties too. Starting with 2026 interest, lenders that receive $600 or more of interest on a qualifying loan in a year generally report it on the new Form 1098-VLI, which includes the VIN and information on original use and final assembly. For 2025, IRS Notice 2025-57 let lenders satisfy the requirement by making a statement of total interest available, so check your lender's online portal if you did not receive a form. If you qualified in 2025 but did not claim the deduction, ask a tax professional whether an amended return makes sense.

Quick answers for common situations

You paid cash or took a 0% promotional loan. There is no interest, so there is nothing to deduct. A buyer choosing between a cash rebate and 0% financing should compare the after-tax cost, since the deduction only helps when interest is actually paid.

You bought the car in December 2024. The loan must have been incurred after December 31, 2024, so a loan signed in December 2024 does not qualify, even if your first payment fell in 2025.

You financed through the dealer. Dealer-arranged financing, including loans from an automaker's finance company, can qualify if the loan and vehicle meet every test. The lender does not have to be a bank.

You use the vehicle partly for a side business. Any interest deducted as a business expense cannot also be deducted here, and the personal-use requirement applies. Mixed-use situations are worth running past a tax professional.

You plan to keep the loan past 2028. Under current law, the deduction applies to tax years beginning before January 1, 2029. Interest paid in 2029 and later is not deductible unless Congress extends the provision.

Records to keep

Keep the buyer's order or retail installment contract, the loan documents showing the origination date, lien, and new-vehicle classification, the window sticker or label showing the final assembly point, a screenshot of the VIN decoder result, and your year-end interest statements. Store copies digitally with your tax files, because you may need them for every year you claim the deduction. State tax treatment can differ from the federal deduction, so check your state's rules.

The bottom line

If you bought a new, U.S.-assembled vehicle with a loan taken out in 2025 or later and your MAGI is under the phase-out range, this deduction is worth claiming every year through 2028. Confirm final assembly with the VIN before you buy, keep the loan paperwork, and report the VIN on Schedule 1-A at tax time.