Car Loan Interest Deduction: Who Qualifies and What It's Worth
Eligible buyers can deduct up to $10,000 a year in interest on a new, U.S.-assembled car, with or without itemizing. Who qualifies, how the income limit works, and a worked example with real numbers.
By Vitaliy Kuznetsov · Updated Sep 25, 2026 · 9 min read
The One Big Beautiful Bill Act, signed into law on July 4, 2025, created a federal deduction for interest on car loans. For tax years 2025 through 2028, eligible buyers can deduct up to $10,000 a year in interest on a qualifying auto loan, even if they take the standard deduction.
It applies to new vehicles with final assembly in the United States, bought for personal use. Unlike most auto-related tax breaks, you do not have to itemize, so it reaches nearly every buyer whose car and loan qualify. Below: who qualifies, how the income limit works, how to claim it, and what it is realistically worth.
The deduction at a glance
- Maximum deduction
- $10,000 per year
- Tax years
- 2025, 2026, 2027 and 2028
- Loans covered
- Originated after December 31, 2024
- Itemizing required?
- No
- Reported on
- Schedule 1-A with Form 1040
The deduction lowers your taxable income, so what you save depends on your bracket. At the 22% bracket, every $1,000 of deductible interest saves $220. It is a federal benefit, so it does not touch Illinois sales tax or fees (more on that below).
Who qualifies
The vehicle and the loan must both meet the rules.
The vehicle
- New only. Used cars do not qualify, even if they are new to you. The original use must begin with you. A demo may qualify if it is properly documented.
- Final assembly in the United States. Check the window sticker or run the VIN through the NHTSA VIN decoder. Assembly plants vary by model and trim, and a brand's reputation is not a reliable guide, so verify the specific car.
- Personal use. Cars, minivans, SUVs, pickups and motorcycles under 14,000 lbs GVWR qualify when they are not bought for business.
Does not qualify: used vehicles, leased vehicles (lease payments are not loan interest), foreign-assembled vehicles, commercial or business vehicles, and RVs, campers, ATVs and trailers.
The loan
- It originates after December 31, 2024.
- It is secured by a first lien on the vehicle.
- It is used to buy the qualifying vehicle. A refinance can stay eligible if it is secured by the original vehicle and stays within the refinanced amount.
- It is tied to a valid VIN.
Lenders report interest to you and the IRS when it reaches $600 in a year. That is a reporting threshold, so keep your own records if you pay less.
The income limit
The deduction starts to phase out when your modified adjusted gross income (MAGI) passes $100,000 ($200,000 for joint filers). It shrinks by $200 for every $1,000 over the threshold.
Example: single filer, $110,000 MAGI
- Over the threshold by $10,000
- Reduction: $10,000 ÷ $1,000 × $200 = $2,000
- The maximum deduction drops from $10,000 to $8,000
- If you paid less than $8,000 in interest, the phase-out changes nothing
What it is worth: a worked example
Take a $45,000 new Honda CR-V assembled in Ohio, financed for 60 months at 7.0% with nothing down. The payment is $891.05 a month and total interest over the loan is $8,463. Assume the loan starts in January 2025 and the buyer is in the 22% bracket.
| Tax year | Interest paid | Deductible | Tax savings (22%) |
|---|---|---|---|
| 2025 | $2,903 | $2,903 | $639 |
| 2026 | $2,340 | $2,340 | $515 |
| 2027 | $1,736 | $1,736 | $382 |
| 2028 | $1,089 | $1,089 | $240 |
| 2029expired | $395 | $0 | $0 |
| Total | $8,463 | $8,069 | $1,775 |
- Most of the interest lands in years one to three, because early payments are mostly interest.
- Four of the five years fall inside the 2025 to 2028 window.
- The deduction expires before the loan is paid off, so 2029 interest earns nothing.
- Total federal tax savings: $1,775, against $8,463 of interest paid.
To see how financing changes the total cost of a specific car, run it through the Out-the-Door Price Calculator.
How it interacts with Illinois sales tax
The deduction is a federal income tax benefit. It does not reduce Illinois sales tax, registration and title fees, or state income tax. It can, however, offset part of what you pay.
For scale: on a $45,000 car at a 7.25% combined sales tax rate, the tax is about $3,263. The $1,775 in federal savings from the example above is roughly half of that. Your actual rate depends on where you register the car, and the calculator looks it up from your ZIP code.
How to claim it
On your 2025 return
- Get your interest statement. Your lender shows total interest paid in 2025. For 2025 only, the IRS allowed lenders flexibility in how they provide it: an online portal, an emailed or mailed statement, or an account dashboard.
- Find your VIN.It is on the registration, the insurance card, the window sticker and the driver's-side dashboard.
- Complete Schedule 1-A. This is the new IRS form for the deduction. You need the VIN, the interest paid and confirmation that the vehicle meets the U.S. assembly requirement.
- File it with Form 1040. The deduction reduces your taxable income.
On 2026 to 2028 returns
Starting with 2026 interest, lenders are expected to send a Form 1098-style statement, like the ones for mortgage interest. It should show total interest received, the outstanding principal, the vehicle year, make, model and VIN, and the loan origination date.
Getting the most from it
Rule of thumb
The deduction saves a fraction of each interest dollar, so you always come out behind on the interest itself. Treat it as a small offset, not a reason to borrow more or buy sooner than you planned.
Timing
The deduction ends after tax year 2028, so each year you wait removes a year of eligible interest. A loan started in January 2026 can deduct interest for 2026, 2027 and 2028. One started in late 2028 can deduct only the last few months of that year.
Loan term
A shorter loan puts more of its interest before the deduction ends. A longer one pushes more interest into 2029 and beyond, where it earns nothing. A 48 to 60 month term often balances an affordable payment against the deduction, but the payment you can comfortably carry matters more.
Down payment
A bigger down payment means less interest, which also means a smaller deduction. On the $45,000 car at 7%:
- 0% down, 60 months: $8,463 in interest, $1,775 in tax savings
- 20% down ($9,000), 60 months: $6,770 in interest, $1,420 in tax savings
The extra down payment costs you $355 of savings and saves you $1,693 of interest, so paying down still wins on cost. To weigh it against investing the cash instead, use the Down Payment Decision Calculator.
Frequently asked questions
Can I claim this if I bought my car in January 2025?
Yes, if the loan started after December 31, 2024 and the vehicle qualifies (new, U.S.-assembled, personal use). Interest paid in 2025 goes on Schedule 1-A with your 2025 return. If you filed without claiming it, ask a tax professional whether amending makes sense.
What if I'm above the income limits?
The deduction shrinks by $200 for every $1,000 your modified adjusted gross income (MAGI) is over $100,000 ($200,000 for joint filers). Applied to the $10,000 maximum, it is gone entirely at $150,000 (single) or $250,000 (joint). If your interest is well under the reduced cap, you may lose little or nothing.
Can I combine this with other tax credits?
It is a deduction from income, not a credit, so it does not replace or reduce other credits by itself. Whether a particular credit stacks with it depends on that credit's own rules, so check with a tax professional.
What if I trade in my vehicle during the loan?
Interest you paid on the original loan while you held it is generally still counted for that year. A new loan qualifies only if the new vehicle does. How the IRS treats negative equity rolled into a new loan is still being clarified, so ask your preparer before assuming that portion counts.
Does refinancing disqualify me?
Not necessarily. A refinanced loan can remain eligible if it is secured by the original qualifying vehicle and stays within the refinanced amount. Borrowing against a different vehicle, or borrowing more than you owed, is a different story.
What about business use?
The deduction is for personal-use vehicles. A car bought for business or commercial use does not qualify, though business vehicles may have their own deductions. If you use a personal car for work part of the time, ask a tax professional how that affects you.
Sources and further reading
- IRS: One Big Beautiful Bill provisions
- IRS guidance on the car loan interest deduction (IR-2025-129)
- Proposed regulations (Federal Register)
- NHTSA VIN decoder, to check where a vehicle was assembled
- Documents to bring to a car dealership, including the loan paperwork this deduction relies on
Important notes
Not tax advice. This article is general education, not tax, legal or financial advice, and V Knows Cars is not a tax advisory service. Individual situations vary, so confirm your eligibility and how the deduction applies to you with a qualified tax professional.
Current as of January 2026. It reflects IRS guidance available then. The IRS may issue further regulations or clarifications, and the law can change. Check IRS.gov for updates to Schedule 1-A, lender reporting and phase-out calculations.
Examples are simplified. Actual interest, savings and deductions depend on your loan terms, tax bracket, income relative to the phase-out, and how your circumstances change during the loan. Verify calculations with your lender and tax preparer. Your eligibility and savings may differ from the examples shown.
Written by V (Vitaliy Kuznetsov)
I've sold cars, run a 3,000-person shopper community and led product at Cars.com. More about me or call or text 847-834-4468 and I'll help with your purchase.