Is Car Loan Interest Tax Deductible Now?

Car loan interest is tax deductible for tax years 2025 through 2028, up to $10,000 a year, but only on a narrow set of loans. The vehicle has to be new, put together at a plant in the United States and bought for personal use, and the loan has to have started after December 31, 2024. Once modified adjusted gross income passes $100,000, or $200,000 on a joint return, the deduction gets cut by $200 for every $1,000 over. You don’t have to itemize to take it.

The deduction came in with Public Law 119-21, signed July 4, 2025. The IRS lists it on its Working Families Tax Cuts deductions page under the heading “No Tax on Car Loan Interest,” which oversells it a little. It’s a deduction against taxable income, so what you save depends on your tax bracket, and someone in the 12% bracket saves 12 cents for each dollar deducted.

Which car loans count

Start with the vehicle. The IRS says it must be a car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds, and the original use has to begin with you. Used vehicles don’t qualify, even a one-year-old trade-in with 8,000 miles on it. Lease payments don’t qualify either.

Then the loan. It must have been taken out after December 31, 2024, the money has to have gone toward buying that vehicle, and the loan has to be secured by a first lien on it. A home equity line or an unsecured personal loan used to pay for a car fails that test, since the car isn’t the collateral.

Final assembly is the test people get wrong, because the brand on the grille tells you nothing. Plenty of foreign badges are built in American plants and some domestic models are assembled abroad. The IRS gives two ways to check. The vehicle information label on a dealer’s lot lists the final assembly location, or you can type the 17-character VIN into the NHTSA VIN decoder and look at the plant of manufacture. Do this before you sign, since a car assembled in Mexico or Canada gets no deduction at all.

How much can you deduct if you earn over $100,000?

Part IV of Schedule 1-A (Form 1040) does the math in seven lines. You enter the interest you paid, capped at $10,000. Then you take your MAGI, subtract $100,000 (or $200,000 if married filing jointly), divide what’s left by $1,000 and round up to the next whole number. Multiply that by $200 and subtract it from your interest.

The rounding is easy to miss. The form says to increase 1.5 to 2 and 0.05 to 1, so a single filer with MAGI of $100,001 loses $200 of deduction, and one at $104,100 loses $1,000, the same as someone at $105,000.

The bigger surprise is what the cut comes off. It’s subtracted from the interest you actually paid, not from the $10,000 cap. Most people don’t pay anywhere near $10,000 of interest in a year. A single filer who paid $2,000 sees the deduction gone at $110,000 of MAGI. At $4,000 of interest it’s gone at $120,000. Only someone paying $10,000 or more in interest keeps something all the way up to $150,000, which is where every single filer runs out. For joint filers, add $100,000 to each of those incomes.

MAGI for this purpose is the adjusted gross income on Form 1040, plus a few items most people never have, such as income excluded from Puerto Rico or under the foreign earned income exclusion. Part I of Schedule 1-A walks through it.

A $48,000 truck loan, worked through

A married couple buys a new pickup in December 2025. The VIN decoder shows a plant in Indiana. They finance $48,000 at 7% for 72 months, with the first payment due in January 2026. The payment comes to $818.35 a month, and over the twelve payments in 2026 about $3,149 of it is interest.

Their 2026 MAGI is $186,000, under the $200,000 line, so they deduct the full $3,149. After the $32,200 standard deduction for a joint return in 2026, their taxable income sits in the 22% bracket, which for joint filers runs from $100,800 to $211,400. $3,149 times 0.22 is about $693 less federal tax for the year.

Now give one of them a $28,500 bonus, so MAGI lands at $214,500. That’s $14,500 over the line. Divided by $1,000 it’s 14.5, which rounds up to 15, and 15 times $200 is $3,000. Their deduction falls from $3,149 to $149. I ran the numbers both ways, and the tax saving drops from about $693 to about $33. A $20,000 bonus instead would have put them $6,000 over and left $3,149 minus $1,200, or $1,949.

Interest also shrinks every year as the balance comes down, so the deduction on a car loan is largest in the first full year and smaller after that. The provision ends with tax year 2028 under current law.

Used cars, leases and refinancing

Used is out, leases are out. Refinancing is treated more kindly. The IRS says that if a qualifying loan is later refinanced, interest on the refinanced amount is generally still deductible. That only works if the original loan qualified. Refinancing a 2023 loan, or the loan on a used car, doesn’t create a deduction. If you’re weighing a refinance for other reasons, our piece on whether to refinance a car loan covers the rate and fee math.

Business use splits the interest. If you drive the truck partly for a business and deduct some of the interest on Schedule C, E or F, that part goes in column (ii) of Part IV and only the rest counts here.

Where it goes on the return

Schedule 1-A, Part IV. Line 22 has room for two VINs, and the VIN is required for every year you claim the deduction. Line 30 is the deduction after the phaseout. It carries to line 38 along with any tips, overtime or senior deduction, and from there to line 13b of Form 1040 or 1040-SR. The IRS fact sheet on Schedule 1-A explains the layout if you’re filling it out by hand.

Because line 13b comes after adjusted gross income, this deduction doesn’t lower your AGI. It lowers taxable income only.

What the lender sends you

For 2025 there was no special form. Under Notice 2025-57, lenders met their reporting duty by making the year’s total interest available through an online portal, a monthly statement, an annual statement or something similar. If you’re still finishing a 2025 return, that portal or year-end statement is where the number comes from.

Starting with interest paid in 2026, lenders use Form 1098-VLI for any of these loans with $600 or more of interest in the year. Two checkboxes on it matter for you. Box 6 is checked if the original use of the vehicle began with you, and box 7 if final assembly happened in the United States. A blank box isn’t proof either way, so keep your purchase paperwork and the VIN decoder result with your tax records.

Before you file your 2026 return

1. Run the VIN through the NHTSA decoder and save a screenshot showing the plant country.
2. Confirm the loan date is after December 31, 2024 and that the car itself secures the loan.
3. Get the 2026 interest total from Form 1098-VLI, or from your lender’s year-end statement if no form arrives.
4. Estimate your MAGI. If you’re single and above about $100,000, or married and above about $200,000, figure the phaseout with the round-up before counting on the deduction.
5. Fill in Part IV of Schedule 1-A with the VIN, and check that line 13b of your 1040 picked up the total.

Related reading

• What Credit Score Do You Need to Buy a Car?
• Who Qualifies for No Tax on Tips, and How Much Is It Worth?
• What Happens to Your Credit Score When You Pay Off a Car Loan?

The $10,000 cap, the $100,000 and $200,000 thresholds and the vehicle tests above come from IRS guidance and the 2025 Schedule 1-A, and line numbers can move on the 2026 form. Read the Schedule 1-A instructions for the year you’re filing, or ask a tax preparer, before you claim car loan interest.