What the deduction is
The IRS allows individuals to deduct interest paid on a loan used to buy a qualified vehicle, up to $10,000 a year, for tax years 2025 through 2028. Publication 505 for 2026 calls it qualified passenger vehicle loan interest. It is taken on the new Schedule 1-A, which the Schedule A instructions describe as the home of the four deductions created in 2025, and it is available whether or not you itemize. It is a deduction, not a credit: it lowers taxable income, so the saving is the interest times your marginal rate.
The conditions
| Test | IRS rule |
|---|---|
| The loan | originated after December 31, 2024; secured by a lien on the vehicle; used to buy the vehicle for personal use; refinanced amounts generally remain eligible; leases do not qualify |
| The vehicle | new, with original use beginning with you; used vehicles excluded |
| Vehicle type | car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds |
| Final assembly | in the United States; check the vehicle information label or the plant of manufacture in the VIN with the NHTSA VIN decoder |
| Your return | the VIN listed for every year you claim the deduction |
| Income | phases out for modified adjusted gross income above $100,000, or $200,000 married filing jointly |
| Years | interest paid in 2025 through 2028 |
The assembly test is the one buyers get wrong: a brand's nationality says nothing about where a particular model is built, and the same model can come from different plants. The vehicle information label and the plant of manufacture encoded in the VIN settle it, and the IRS names the NHTSA VIN decoder as the tool. Lenders must file information returns with the IRS and send you a statement of the interest received, so the figure on the return is the lender's, not your own calculation.
One loan, year by year
A $42,000 new vehicle with $4,000 down, so a $38,000 loan at 7% over 60 months: the payment is $752 a month and the interest over the loan $7,147. The deduction follows the interest, which is front-loaded:
| Year | Interest paid | Principal paid | Balance at year end | Tax saved at 12% | Tax saved at 22% |
|---|---|---|---|---|---|
| 1 | $2,452 | $6,578 | $31,422 | $294 | $539 |
| 2 | $1,976 | $7,053 | $24,369 | $237 | $435 |
| 3 | $1,466 | $7,563 | $16,806 | $176 | $323 |
| 4 | $920 | $8,110 | $8,696 | $110 | $202 |
| 5 | $333 | $8,696 | $0 | $40 | $73 |
No year comes near the $10,000 cap; at 7% over 60 months a loan would need to be about $154,999 for the first year's interest to reach it. Over the five years the deduction saves $1,572 at a 22 percent marginal rate, which is worth having but changes no decision about how much car to buy: the interest itself is still paid in full. The car loan calculator produces this schedule for any price, rate and term, and the loan calculator the same for a refinance.
Where it fits
- A lower rate beats the deduction. One percentage point less on this loan, 6% instead of 7%, saves $1,068 of interest over the term, before tax; the deduction returns only a fraction of the interest you do pay.
- The phase-out matters at the top. The IRS sets the start of the phase-out at $100,000 of modified adjusted gross income, $200,000 joint; above the start the deduction shrinks, and a household well above it should expect little or nothing.
- Keep the paperwork. The lender's interest statement, the window sticker or door label showing the assembly plant, and the purchase contract showing the date and the lien.
- It is temporary. Interest paid after 2028 is not deductible under this provision unless the law is extended.
This guide follows the IRS description of the deduction and Publication 505 for 2026. The final Schedule 1-A instructions govern the return; state income tax rules are separate.
Frequently asked questions
Is car loan interest tax deductible?
For 2025 through 2028, yes, within limits: the IRS allows a deduction of up to $10,000 a year of interest on a loan taken out after December 31, 2024 to buy a new vehicle for personal use, if the vehicle's final assembly took place in the United States. The deduction phases out for modified adjusted gross income above $100,000, or $200,000 on a joint return, and is available whether or not you itemize. Used vehicles and leases do not qualify.
Which vehicles qualify?
Per the IRS: cars, minivans, vans, SUVs, pickup trucks and motorcycles with a gross vehicle weight rating under 14,000 pounds, bought new so that the original use starts with you, for personal use, with final assembly in the United States. The IRS points to the vehicle information label or the plant of manufacture in the VIN, which the NHTSA VIN decoder reads, to check the assembly point.
Does a refinanced loan still qualify?
The IRS says refinanced amounts generally remain eligible, as long as the original loan met the conditions and the refinancing does not exceed the balance being refinanced. The loan must be secured by a lien on the vehicle; an unsecured personal loan used to buy a car does not count, and a lease never does.
How do I claim the car loan interest deduction?
On the new Schedule 1-A with your Form 1040, listing the vehicle identification number for each year you claim it. Lenders must file information returns with the IRS and send you a statement showing the interest received, which is the figure to use. The deduction reduces taxable income; it does not change the loan payment or the lender's interest.
How much is the deduction worth?
The interest times your marginal tax rate. On a $38,000 loan at 7 percent over five years, first-year interest is about $2,460; at a 22 percent marginal rate that saves about $541 of federal tax, and at 12 percent about $295. The interest, and with it the saving, falls every year as the balance declines, and the $10,000 cap is far above what a typical car loan charges in a year.
Sources
- IRS: One Big Beautiful Bill Act tax deductions for working Americans and seniors (no tax on car loan interest: 2025 through 2028; up to $10,000; loan originated after December 31, 2024, secured by a lien, for personal use; refinancing; leases excluded; new vehicle with original use by the taxpayer; vehicle types under 14,000 pounds; final assembly in the United States and the VIN; VIN on the return; phase-out above $100,000 or $200,000; lender reporting)
- IRS Publication 505 (2026), Tax Withholding and Estimated Tax (no tax on car loan interest for qualified passenger vehicle loan interest paid in 2026 on a vehicle purchased after 2024; the $10,000 limit and the $100,000 and $200,000 thresholds)
- IRS 2025 Instructions for Schedule A (Form 1040) (the new Schedule 1-A for the four deductions, including no tax on car loan interest)