Car loan interest deduction: who qualifies in 2026?

By Kayla C. · Updated August 25, 2026 · Published June 23, 2026 · 11 min read

Yes, some car loan interest is now deductible on your federal tax return. For tax years 2025 through 2028, you may deduct up to $10,000 a year of interest paid on a qualifying loan used to buy a new vehicle that was finally assembled in the United States.

But this is not a deduction for every car payment. The vehicle, loan and your income all have to meet specific rules.

The biggest filters are simple: the vehicle generally must be new, its final assembly must be in the U.S., the loan must have been incurred after December 31, 2024 and secured by a first lien on the vehicle, and the vehicle must be purchased primarily for personal use.

Key takeaways

You can deduct up to $10,000 of qualifying vehicle loan interest per federal tax return each year for tax years 2025 through 2028.
You can claim the deduction whether you use the standard deduction or itemize.
The vehicle’s original use must begin with you, so used and certified pre-owned vehicles do not qualify.
Final assembly must occur in the United States.
Eligible vehicles include cars, SUVs, pickups, vans, minivans and motorcycles with a gross vehicle weight rating under 14,000 pounds.
The loan generally must have been incurred after December 31, 2024 and secured by a first lien on the vehicle.
The deduction begins phasing out above $100,000 of modified AGI, or $200,000 for married couples filing jointly.
You must report the vehicle’s VIN when claiming the deduction.

What is the car loan interest deduction?

The One Big Beautiful Bill Act created a temporary federal deduction for qualified passenger vehicle loan interest.

It applies to tax years:

2025
2026
2027
2028

The maximum is $10,000 per federal tax return per year.

Before this change, interest on a personal auto loan was generally nondeductible personal interest. The new rule creates a limited exception for qualifying vehicles and loans.

For the broader tax changes created by the law, see our complete OBBBA tax changes guide.

You do not have to itemize

This is one of the most useful parts of the new deduction.

You can claim qualified car loan interest whether you take the standard deduction or itemize deductions.

However, I would not describe this as a traditional “above-the-line deduction.”

For the 2025 return, the IRS placed the deduction on Schedule 1-A, Part IV, and the total additional deductions from Schedule 1-A flow to Form 1040 after adjusted gross income has already been calculated.

In other words, the deduction can reduce your taxable income, but it generally does not reduce your AGI itself.

That distinction matters because other tax calculations may be based on AGI.

Which vehicles qualify?

The vehicle must meet several requirements.

It must be new to you

The vehicle’s original use must begin with you.

That means:

New vehicles can qualify.
Used vehicles do not.
Certified pre-owned vehicles do not.

It does not matter how recently the used vehicle was manufactured. If someone else used it first, it does not meet this requirement.

Final assembly must be in the United States

The vehicle must undergo final assembly in the U.S.

The manufacturer’s nationality does not decide whether it qualifies.

A vehicle from a foreign-owned automaker could qualify if that specific vehicle was assembled in the United States. A model sold by a U.S. automaker could fail the test if that particular vehicle was assembled outside the country.

Do not rely only on the model name because assembly locations can vary.

The IRS recommends checking:

The vehicle label at the dealership
The VIN
The NHTSA VIN Decoder

Check the actual vehicle before assuming it qualifies.

It must be an eligible passenger vehicle

The IRS currently lists these vehicle types:

Car
Minivan
Van
SUV
Pickup truck
Motorcycle

The vehicle must have a gross vehicle weight rating of less than 14,000 pounds.

Which auto loans qualify?

The loan rules are just as important as the vehicle rules.

Generally, the debt must:

Be incurred after December 31, 2024.
Be used to purchase the qualifying vehicle.
Be secured by a first lien on that vehicle.
Relate to a vehicle purchased for qualifying personal use.

A conventional secured auto loan through a lender or dealership may meet these requirements, but do not assume that every financing arrangement automatically qualifies.

Check the loan documents.

Personal loans generally do not qualify

Suppose you borrow $40,000 with an unsecured personal loan and use the cash to buy an eligible SUV.

The SUV may meet the vehicle rules, but the interest generally would not qualify because the loan is not secured by a first lien on the vehicle.

The same issue can arise if you use home equity financing to buy the car. The debt is secured by your home rather than the vehicle.

Leases do not qualify

A lease is not a qualifying vehicle purchase loan for this deduction.

If you lease a new U.S.-assembled vehicle, you cannot deduct the lease’s financing component under the car loan interest deduction.

Can interest on a refinanced auto loan qualify?

Potentially, yes.

The IRS states that if a qualifying vehicle loan is later refinanced, interest on the refinanced amount can generally remain eligible.

The important limitation is that the new debt must continue to meet the applicable lien requirement, and the qualifying refinanced amount is generally limited to the outstanding balance of the original qualifying loan when you refinance.

So refinancing a $25,000 qualifying balance into a $35,000 loan does not automatically turn the full $35,000 into qualifying vehicle debt.

What are the income limits?

The deduction is reduced once modified adjusted gross income, or MAGI, passes:

$100,000 for taxpayers other than married couples filing jointly
$200,000 for married couples filing jointly

The reduction is $200 for each $1,000, or portion of $1,000, that your MAGI exceeds the threshold.

The important detail is that the phase-out applies to the amount of qualified interest you would otherwise be allowed to deduct.

Example: $120,000 MAGI

Suppose you are single and have $120,000 of MAGI.

You are $20,000 above the $100,000 threshold.

$20,000 ÷ $1,000 = 20

20 × $200 = $4,000 phase-out

If you otherwise had $6,000 of deductible qualifying interest, the deduction would fall to:

$6,000 − $4,000 = $2,000

If you had paid only $3,000 of qualifying interest, the $4,000 phase-out would eliminate your deduction entirely.

This is why saying that the deduction simply “ends at $150,000” can be misleading.

A taxpayer with the full $10,000 potential deduction would see it completely phased out at $150,000 of MAGI, or $250,000 on a joint return. But someone with less qualifying interest can lose the deduction at a lower income.

How much can you actually deduct?

The $10,000 figure is a maximum, not an automatic deduction.

If you paid $2,400 of qualifying interest during the year, your starting deduction is $2,400, not $10,000.

The income phase-out can reduce that amount further.

For most ordinary auto loans, annual interest may be well below the $10,000 cap.

That means the practical question is usually:

How much qualifying interest did you actually pay?

Not:

How do I get the full $10,000 deduction?

How much is the deduction worth?

A deduction reduces taxable income. It is not a $10,000 tax credit.

For example, suppose you have $3,000 of qualifying interest and the full $3,000 is deductible.

If that deduction reduces income that otherwise would have been taxed at a 22% marginal federal rate, the federal income tax effect could be roughly:

$3,000 × 22% = $660

Your actual savings can differ because tax calculations depend on your full return.

The important point is that a $3,000 deduction does not mean the IRS gives you $3,000 back.

A realistic car loan example

Suppose you finance $40,000 at 7% for six years.

The monthly payment is about $682.

During the first 12 months of a normal amortizing loan, you would pay roughly $2,624 of interest.

If:

The vehicle qualifies
The loan qualifies
Your income does not reduce the deduction
You can deduct the entire $2,624

then a taxpayer whose deduction reduces income taxed at a 22% marginal rate could see a federal tax effect of roughly:

$2,624 × 22% = $577

That is useful, but it does not make a 7% auto loan cheap.

You would still have paid more than $2,600 of interest to potentially save several hundred dollars in federal tax.

Do not take out a larger or longer car loan just to create a bigger tax deduction.

What if I use the vehicle partly for business?

This area needs more care than simply saying “business vehicles do not qualify.”

The statute requires a vehicle purchased for personal use, and current IRS guidance describes the deduction as applying to qualifying personal-use vehicles.

Treasury and IRS proposed regulations issued in early 2026 go further. Under those proposed rules, a vehicle could satisfy the personal-use test if, when the debt is incurred, the taxpayer expects the vehicle to be used more than 50% for personal use by the taxpayer or certain family or household members.

Those regulations are still proposed as of August 2026, so taxpayers with mixed personal and business use should check the final IRS rules or work with a tax professional rather than assuming the entire interest amount qualifies.

There can also be separate rules for interest that is independently deductible as a business expense.

Does negative equity from a trade-in qualify?

Not necessarily.

If you trade in a vehicle worth less than the amount you still owe and roll that negative equity into your new loan, the portion of debt tied to the old vehicle may not qualify as debt used to purchase the new qualifying vehicle.

Treasury’s proposed regulations provide allocation rules for situations like this.

This is another case where the interest shown on your auto loan statement may not automatically equal the amount eligible for the new deduction.

If your financing includes rolled-over negative equity, review the purchase and loan documents carefully.

How do you claim the deduction?

For the 2025 tax year, the IRS instructed taxpayers to report qualified passenger vehicle loan interest on Schedule 1-A, Part IV, which is attached to Form 1040.

You also need information supporting the deduction, including:

Vehicle identification number
Vehicle purchase information
Proof the vehicle meets the eligibility requirements
Records showing qualifying interest paid
Loan documents

You must include the VIN on your return for a year in which you claim the deduction.

For the 2026 tax year filed in 2027, use the final IRS forms and instructions available at filing time rather than relying on old screenshots or line numbers.

The IRS has also created Form 1098-VLI, Vehicle Loan Interest Statement, for vehicle-loan interest reporting. Keep any statement your lender provides and compare it with your own records.

Was this deduction already available for 2025?

Yes.

This is important because some explanations online make it sound as though the deduction begins with 2026 taxes.

It does not.

The deduction applies beginning with tax year 2025, so eligible taxpayers could first claim it on their 2025 federal return filed during the 2026 filing season.

The 2026 return filed in 2027 is the second tax year in which the deduction is available, not the first.

What does not qualify?

In general, you should not expect the new deduction for:

Used vehicles
Certified pre-owned vehicles
Vehicles whose final assembly occurred outside the United States
Leased vehicles
An unsecured personal loan used to buy a vehicle
A home equity loan that is not secured by the required first lien on the vehicle
Interest on a personal auto loan incurred on or before December 31, 2024
Debt attributable to nonqualifying amounts that were rolled into the financing
Interest paid outside tax years 2025 through 2028, unless Congress changes the law

Mixed personal and business use can be more complicated, so do not automatically put every mixed-use vehicle into the “does not qualify” category.

Should this deduction affect which car you buy?

I would treat the deduction as a bonus, not as a reason to buy a more expensive vehicle.

Suppose one qualifying car costs $45,000 and another car you actually prefer costs $35,000.

A possible tax deduction on loan interest does not erase a $10,000 price difference.

The same logic applies to financing.

A longer loan can create more interest, and therefore potentially more deductible interest, but you are still paying that interest to the lender.

Saving part of an interest cost through taxes is not the same as avoiding the interest cost.

Choose the vehicle and loan based on the full purchase price, APR, monthly payment and total interest first. Then calculate the deduction as a secondary benefit.

FAQ

Can I deduct car loan interest on a used car?

No. The vehicle’s original use must begin with the taxpayer claiming the deduction. Used and certified pre-owned vehicles do not qualify.

Does the car have to be made by an American company?

No. The rule is based on final assembly in the United States, not the nationality of the automaker. Check the specific VIN or vehicle label.

Do I have to itemize deductions?

No. The deduction is available to eligible taxpayers who take the standard deduction as well as those who itemize.

Is the car loan interest deduction above the line?

Not in the usual sense of an adjustment that reduces AGI. The IRS reports the new deduction through Schedule 1-A. It can reduce taxable income even if you take the standard deduction, but it generally does not reduce AGI itself.

What is the maximum car loan interest deduction?

Up to $10,000 per federal tax return per year for tax years 2025 through 2028, before applying the MAGI phase-out. You cannot deduct more qualifying interest than you actually paid or accrued.

At what income does the deduction phase out?

The phase-out begins above $100,000 of MAGI, or $200,000 for married couples filing jointly. The deduction is reduced by $200 for every $1,000 or portion of $1,000 over the applicable threshold.

Does a refinanced car loan qualify?

Interest can generally remain eligible when a qualifying vehicle loan is refinanced, subject to requirements including the first-lien rule and limits based on the outstanding qualifying balance at refinancing.

Do I need my VIN to claim the deduction?

Yes. The IRS requires taxpayers to include the qualifying vehicle’s VIN on the return when claiming the deduction.

Bottom line

You can deduct up to $10,000 a year of qualifying car loan interest for tax years 2025 through 2028, but the rules are much narrower than simply “car loan interest is now deductible.”

The strongest candidates are borrowers who bought a new qualifying vehicle after 2024, have a loan secured by a first lien on that vehicle, use it primarily for personal purposes, and fall below the income phase-out.

Before counting on the deduction:

Check the vehicle’s final assembly location.
Confirm the vehicle’s original use began with you.
Review how the loan is secured.
Add up the qualifying interest you actually paid.
Apply the MAGI phase-out.
Keep the VIN, lender statement and purchase records.

And remember that this is a deduction, not a credit. It can reduce the after-tax cost of qualifying interest, but it does not make an expensive auto loan a good financial decision.

For step-by-step filing help, see:

This article is for educational purposes only and is not individualized tax, legal or financial advice. The IRS and Treasury have issued proposed regulations covering some details of the car loan interest deduction, and guidance may continue to change. Check the final IRS instructions that apply to your tax year or consult a qualified tax professional before filing.