Short answer: yes — for tax years 2025 through 2028, you can deduct up to $10,000 a year of interest paid on a loan used to buy a qualifying new vehicle, and you do not need to itemize to claim it. The deduction was created by the One Big Beautiful Bill Act (P.L. 119-21), signed July 4, 2025, and the Treasury and IRS finalized the rules in T.D. 10054, which take effect today, November 9, 2026. The catch is in the conditions: the vehicle must be new, finally assembled in the United States, and the loan must have been taken out after December 31, 2024. Income limits phase the deduction out above $100,000 of modified adjusted gross income ($200,000 for joint filers).
Try it now: open the free Car Loan Interest Deduction Calculator and enter the interest you paid, your MAGI and your filing status. It works out your allowed deduction after the phase-out and the tax it saves — no sign-up, no download.
What the Deduction Is
For decades, interest on a personal car loan was not deductible on a federal tax return. The new law changes that for four tax years — 2025, 2026, 2027 and 2028. It covers interest only, not principal, on what the law calls a "qualified passenger vehicle loan". The maximum is $10,000 per return per year, not per car and not per person on a joint return. Because it is claimed on the new Schedule 1-A of Form 1040 rather than as an itemized deduction, you keep your standard deduction and still claim this one. Unless Congress extends it, interest paid in 2029 and later will not qualify — so a six-year loan taken out in 2026 will outlive the deduction by years.
Starting with the 2026 tax year, lenders must send borrowers a Form 1098-VLI (Vehicle Loan Interest Statement) by January 31 for any qualifying loan on which you paid $600 or more in interest during the year. For 2025 returns, you claim the deduction with the VIN and your own records; the lender statement is a 2026-onwards requirement.
Who Qualifies — the Three Tests
All three tests must pass: the loan, the vehicle and you.
| Test | Requirement |
|---|---|
| The loan | Originated after December 31, 2024; used to purchase the vehicle; secured by a first lien on it; from a legitimate lender or dealer |
| The vehicle | New — original use starts with you; car, minivan, van, SUV, pickup or motorcycle; final assembly in the United States; gross vehicle weight rating under 14,000 pounds |
| You | Personal use expected to be more than 50% of the time; MAGI below the phase-out; VIN reported on the return |
What does not qualify: used vehicles under any circumstances; leases, because lease payments are not loan interest; campers and RVs; and business use claimed twice — the same interest dollars cannot be claimed here and on Schedule C. A vehicle from an earlier model year can still qualify if it is first sold to a non-dealer buyer during the eligible period. The final regulations also allow related costs financed in the same loan — sales tax, title and registration, extended warranties, GAP waivers and similar vehicle-related items — while cash-out proceeds and unrelated personal property do not qualify.
The Income Phase-Out
The $10,000 maximum shrinks by $200 for every $1,000 (or part of $1,000) of MAGI above the threshold:
| Filing status | Phase-out begins | Fully phased out |
|---|---|---|
| Single, head of household, other | $100,000 MAGI | $150,000 MAGI |
| Married filing jointly | $200,000 MAGI | $250,000 MAGI |
At $110,000 MAGI as a single filer you are $10,000 over the threshold, so the maximum falls by $2,000 to $8,000. At $125,000 it falls by $5,000 to $5,000. At $150,000 it reaches zero. The phase-out applies to the maximum, not to your actual interest — if you paid $4,200 of interest and your maximum is $5,000, you deduct the full $4,200.
Worked Examples: What It Actually Saves
Take a $35,000 loan at 7% over 60 months: the monthly payment is $693.04, and the interest paid in the first year is $2,258.07. At the 22% marginal bracket, deducting that interest saves $496.78 in tax. A larger loan — $45,000 at 6.5% over 72 months — pays $2,738.36 of interest in year one and saves $602.44 at 22%.
| Interest paid in the year | Tax saved at 22% | Tax saved at 12% |
|---|---|---|
| $2,258.07 ($35,000 loan, year 1) | $496.78 | $270.97 |
| $4,200 (calculator default) | $924.00 | $504.00 |
| $10,000 (the maximum) | $2,200.00 | $1,200.00 |
Two honest limits: the deduction is worth your marginal rate times the interest, so in the 12% bracket the same $10,000 of interest saves $1,200, not $2,200. And interest falls every year as the loan amortizes — the first-year figure is the biggest one you will ever claim on that loan. Use the calculator's defaults ($4,200 of interest, $68,000 MAGI) to see your own position: at that income you are below the phase-out entirely, so the full $4,200 is deductible and saves $924 at 22%.
Tax saved at the 22% bracket, by interest paid in the year — hover or tap each bar for details.
How to Claim It
1. Check the loan date (after December 31, 2024), the vehicle's final-assembly country — the window sticker or the NHTSA VIN decoder confirms it — and that the vehicle is new to you. 2. Add up the interest you actually paid in the tax year, from your statements or, from 2026, Form 1098-VLI. 3. Work out your MAGI and the phase-out: the calculator does this in one step. 4. Report the deduction on Schedule 1-A (Form 1040), Part IV, "No Tax on Car Loan Interest", and include the VIN of each qualifying vehicle. Keep the loan agreement and the interest records — the VIN and the lender statement are the two items the IRS checks first.
Do not buy a car for the deduction: the deduction is worth at most your marginal rate on the interest — $2,200 on $10,000 of interest at 22% — while the interest itself is a real cost you pay. A $35,000 loan at 7% costs $2,258.07 of interest in year one to save $496.78 of tax. The deduction makes a loan you were taking anyway cheaper; it never makes an unnecessary loan a good idea.
Frequently Asked Questions
Can you deduct car loan interest in 2026?
Yes, if the loan and vehicle qualify: a new US-assembled vehicle, a loan taken out after December 31, 2024, secured by a first lien, personal use over 50%, and MAGI below the phase-out. The deduction is up to $10,000 a year for tax years 2025 through 2028, claimed on Schedule 1-A without itemizing.
How much car loan interest can I deduct?
Up to $10,000 per return per year of interest actually paid, reduced by the income phase-out: $200 less for every $1,000 of MAGI above $100,000 (single) or $200,000 (joint), reaching zero at $150,000 and $250,000.
Do I need to itemize to deduct car loan interest?
No. The deduction is claimed on Schedule 1-A of Form 1040, so you can take the standard deduction and still claim it. You do need the vehicle's VIN on the return.
Does a used car qualify for the car loan interest deduction?
No. The vehicle's original use must start with you — used vehicles do not qualify under any circumstances. Leases, campers and RVs also do not qualify.
What is Form 1098-VLI?
The Vehicle Loan Interest Statement. From the 2026 tax year, lenders must send it by January 31 for any qualifying loan on which you paid $600 or more of interest. It reports the interest you paid and the VIN.
How long does the car loan interest deduction last?
Tax years 2025 through 2028. Unless Congress extends it, interest paid in 2029 and later will not qualify — even on a loan taken out during the eligible period.
Sources: One Big Beautiful Bill Act, P.L. 119-21, signed July 4, 2025; Treasury/IRS final regulations T.D. 10054, published in the Federal Register September 8, 2026, effective November 9, 2026; TaxAct — car loan interest deduction (updated for tax years 2025 and 2026); TaxGirl — IRS finalizes rules for the new car loan interest deduction, September 22, 2026; AsadWebs Car Loan Interest Deduction Calculator (defaults $4,200 interest, $68,000 MAGI; all loan and tax figures verified by independent calculation). Tax law changes; confirm your situation with a tax professional. This article explains the rules and is not tax advice.
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