Car Loan Interest Deduction: New Rules

By Tom, CPA · Updated October 27, 2026

Part of: Tax Planning

TL;DR: Interest on loans after 2024 for new, U.S.-assembled personal vehicles under 14,000 lb is deductible up to $10,000 a year through 2028, itemizing or not, phased out above $100,000 MAGI ($200,000 joint).

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

For decades, interest on a personal car loan was the tax equivalent of a gym membership you never use: you paid for it, and got nothing back. The 2025 tax law changed that, temporarily and with an impressive list of conditions. For 2025 through 2028, you can deduct up to $10,000 a year of interest on a loan for a new, U.S.-assembled personal vehicle, whether or not you itemize. The tax code is 4 million words long; you need about 400 of them to know whether your car, your loan and your income all qualify.

This guide covers the vehicle rules, the loan rules, the income phaseout, how much it actually saves, and how to claim it, as of Oct 2026, based on IRS guidance. For the rest of the law, see the 2025 tax law changes.

CPA Warning Label: The deduction saves a fraction of the interest. It is not a reason to finance instead of paying cash, or to buy a car you would not otherwise buy.

The rules at a glance

Source: IRS Working Families Tax Cuts guidance. Claimed on Schedule 1-A.

Does your vehicle qualify?

The vehicle must be one whose original use starts with you, which effectively means new, not used. It must have a gross vehicle weight rating under 14,000 pounds, and its final assembly must have occurred in the United States.

The IRS says you can verify final assembly by checking:

• the vehicle information label on the window at the dealership,
• the VIN, or
• the NHTSA VIN Decoder, which shows the plant of manufacture.

Brand nationality does not matter. Some foreign-brand vehicles are assembled in the U.S., and some U.S.-brand vehicles are assembled abroad. Check the specific vehicle, not the logo. Even the same model can be built in different plants depending on trim and model year, so verify the VIN of the car you are actually buying rather than the one in the brochure.

Used vehicles do not qualify, even if U.S.-assembled. Nor do vehicles used for business; business vehicle interest falls under the existing business rules instead; see mileage vs actual expenses.

Does your loan qualify?

• Originated after December 31, 2024. A loan from 2024 or earlier does not qualify, even for interest paid in 2025.
• Used to buy the vehicle and secured by a lien on it. An unsecured personal loan or a home equity loan used to buy a car does not count.
• Refinancing: per the IRS, if a qualifying loan is later refinanced, interest on the refinanced amount is generally eligible.
• Leases are not loans and do not qualify.
• Related-party loans (for example, from a family member) are excluded under the statute.

Lenders must report qualified interest to the IRS and send you a statement showing interest received during the year.

The income phaseout

The deduction is reduced by $200 for each $1,000 of MAGI above $100,000 ($200,000 joint). With a $10,000 maximum, the deduction is gone at $150,000 single or $250,000 joint.

Your actual deduction is the lesser of the interest paid and the phased-down cap. To pay $10,000 of interest in a year you would need roughly a $150,000 loan at 7%, so most borrowers will pay far less than $10,000 of interest anyway, so the cap matters less than the phaseout for many people.

How much it really saves

Interest is front-loaded on an amortizing loan. A $40,000 loan at 7% over 60 months pays roughly $2,600 of interest in the first full year, declining after that.

• At a 12% marginal rate: about $310 saved in year one.
• At a 22% rate: about $570.
• At a 24% rate: about $620.

Pleasant, but not a reason to buy a car you otherwise would not, finance a car you could pay cash for, or choose a higher-interest loan. Paying 7% interest to save 22% of it is still paying 5.46% net. See the real cost of cars.

Because the deduction is below-the-line, it does not reduce AGI. It will not help with AGI-based limits such as IRA deduction phaseouts.

How it compares with other interest deductions

See the mortgage interest guide and the student loan interest deduction.

Claiming it

1. Get the lender's interest statement for the year.
2. Confirm the loan date, the VIN and U.S. final assembly. Save a screenshot of the NHTSA decoder result.
3. Compute MAGI and the phaseout on Schedule 1-A.
4. Enter the VIN on the return.
5. Keep the purchase contract, loan documents and statements; see how long to keep tax records.

Because it does not require itemizing, it works with the standard deduction. Taking the standard deduction? You can still claim it; see the standard deduction for early retirees.

Edge cases

• Mixed personal and business use. The deduction is for personal-use vehicles. If you use the vehicle partly for business, the business share of interest belongs on your business return, and how the personal share is treated may depend on IRS guidance. Keep a mileage log either way.
• Co-borrowers. Generally the person who is liable on the loan and actually pays the interest claims it. Married couples filing jointly simply claim it on the joint return.
• Trade-in with negative equity. If old loan balance is rolled into the new loan, the portion of the loan that paid off the old car may not be "used to purchase" the new vehicle. Expect the IRS to look at how proceeds were used.
• Dealer add-ons. Extended warranties, service contracts and other products financed into the loan may not count as purchase price. Ask the lender how the interest statement handles them.
• Buying in late 2028. You can deduct only interest paid through 2028, so a late-2028 purchase yields a few months of deduction at most.
• Paying off early. Prepaying the loan reduces interest, and therefore the deduction. Saving $1 of interest is still better than deducting it.
• Selling the car. The deduction stops when you stop paying interest on the qualifying loan.

Should this change how you buy a car?

Mostly no. The best car-buying moves are still the boring ones: buy what you need, compare total cost of ownership, shop rates from banks and credit unions before visiting the dealer, and keep the term short. The deduction is a small rebate on interest, not a subsidy on the car.

Where it might tip a decision:

• Choosing between two similar new vehicles, one U.S.-assembled and one not, when you will finance either way.
• Choosing to finance at a promotional low rate while keeping cash invested, where after-tax interest becomes lower still.
• Choosing between leasing and financing, since leases do not qualify.

For most households, the tax saving will be a few hundred dollars a year. It is worth claiming. It is not worth a car payment.

Illustration:

Casey, single, MAGI $118,000, bought a new U.S.-assembled SUV in March 2026 with a $45,000 loan at 6.5%, paying about $2,100 of interest in 2026 (nine payments).

• MAGI exceeds $100,000 by $18,000, so the cap drops by 18 x $200 = $3,600, to $6,400.
• Interest paid ($2,100) is under the reduced cap, so Casey deducts $2,100.
• After the $16,100 standard deduction and this deduction, Casey's taxable income is about $99,800, in the 22% bracket, so the saving is about $460.

If Casey's MAGI were $145,000, the cap would be $1,000, and the deduction would be limited to $1,000. At $150,000 or more, zero. Illustrative only.