For nearly four decades, interest on a personal car loan has been squarely off-limits as a tax deduction — a casualty of the 1986 tax reforms that eliminated most consumer interest deductions. The OBBBA brought a version of it back, but with real restrictions worth understanding before you assume your next car purchase qualifies.
The Basics: $10,000 Cap, New US-Assembled Vehicles Only
Eligible taxpayers can deduct up to $10,000 per year in interest paid on a qualifying auto loan, for tax years 2025 through 2028. To qualify, the vehicle must be:
- New (not used or a lease) — purchased after December 31, 2024
- A passenger vehicle (car, SUV, truck, or minivan) intended primarily for personal use
- Assembled in the United States — this includes foreign-brand vehicles with US assembly plants, not just domestic manufacturers; check your specific vehicle's VIN or window sticker for the assembly location
- Financed with a bona fide auto loan (not, for example, a personal loan or home equity line used to buy a car)
The deduction is above-the-line — available whether you itemize or take the standard deduction.
The Income Phase-Out
The deduction phases out for higher earners: reduced proportionally between $100,000 and $150,000 of MAGI for single/Head of Household/Married Filing Separately filers, and between $200,000 and $300,000 for Married Filing Jointly. At the midpoint of either range you get roughly half the deduction; above the upper limit, the deduction is zero.
New Form 1098-VLI
Starting with the 2026 tax year, your lender is required to send you Form 1098-VLI if you paid at least $600 in qualifying interest during the year, showing the interest paid and other details needed to claim the deduction on Schedule 1-A, Part IV — including the vehicle's VIN, which you'll need to enter on your return. For 2025 interest (claimed on the return filed in early 2026), lenders weren't yet required to issue this form, so you may need to reconstruct the figure from your own loan statements for that first year.
What Doesn't Qualify
Used vehicles, leases, vehicles not assembled in the US, vehicles used primarily for business (which have their own separate deduction mechanisms), and interest on loans that aren't dedicated auto loans (like a general personal loan used to buy a car) all fall outside this deduction. This is a narrower benefit than the "car loan interest" headline suggests — many common car-buying and financing scenarios don't qualify at all.
⚠️ Don't assume state conformity. As of current guidance, most states have not enacted a matching state-level deduction, meaning this benefit typically only reduces your federal taxable income, not your state taxable income. Check your specific state's treatment before factoring the deduction into your state tax planning.
A Worked Example
A single filer with $120,000 MAGI buys a new, US-assembled SUV financed with a $35,000 auto loan, paying $2,400 in interest during 2026. Since $120,000 falls between the $100,000-$150,000 phase-out range (40% of the way through, at $20,000 of the $50,000 range), the deduction is reduced by roughly 40%, leaving about $1,440 deductible instead of the full $2,400.
Leased Vehicles Don't Qualify
Because the deduction is specifically for loan interest, a leased vehicle doesn't qualify at all, regardless of whether the lease is for a new, US-assembled vehicle — there's no interest component in a standard lease payment in the way there is with an auto loan. This is a meaningful distinction for anyone comparing lease-versus-buy decisions on a new vehicle purchase where this deduction might otherwise factor into the math.
Common Questions
Does a motorcycle or RV qualify? The deduction is generally limited to qualifying passenger vehicles as defined in the regulations; check current IRS guidance for exactly which vehicle types are included, since this has been an area of continued clarification since the law passed.
What if I refinance my auto loan? Refinancing rules have specific guidance under the regulations — generally the replacement loan needs to still be secured by the same qualifying vehicle and not exceed the original loan's remaining balance for the interest to keep qualifying.
Can I claim this for a car I already owned before 2025? No — the vehicle must have been purchased new after December 31, 2024; interest on a loan for an older vehicle doesn't qualify regardless of when the loan itself originated.
💡 This deduction isn't currently modeled in the calculator — see our Methodology page for the current scope. Subtract your qualifying deductible interest from your taxable income manually when estimating your federal tax.