If you took out a loan to buy a new car after December 31, 2024, a provision of the One Big Beautiful Bill Act may allow you to deduct some or all of the interest you pay on that loan from your federal income taxes. The no-tax-on-car-loan-interest deduction can be worth up to $10,000 per year, and unlike many deductions, you do not have to itemize to claim it. Here is what you need to know about eligibility, income limits, and how to file.
What Is the Car Loan Interest Deduction?
Before the OBBBA, interest paid on personal auto loans was not deductible for federal income tax purposes. Car loan interest fell into the category of "personal interest," which has been nondeductible for most taxpayers since the Tax Reform Act of 1986.
The One Big Beautiful Bill Act, signed July 4, 2025, created a specific exception. For tax years 2025 through 2028, eligible taxpayers can deduct up to $10,000 per year in qualified passenger vehicle loan interest. The deduction is above the line, meaning it is available whether you take the standard deduction or itemize.
Who Qualifies?
To claim the car loan interest deduction, the vehicle and loan must meet all of the following requirements:
Vehicle Requirements
- The vehicle must be new -- used vehicles do not qualify under any circumstances.
- The vehicle must have had its final assembly in the United States. Partially assembled vehicles do not qualify.
- It must be a passenger vehicle purchased for personal use, not a business or commercial vehicle.
- The loan must have been originated after December 31, 2024.
Loan Requirements
- The loan must be a purchase loan secured by a first lien on the vehicle.
- Lease payments do not qualify. This deduction applies to financing, not leasing.
- You can only deduct interest actually paid during the tax year, up to the $10,000 annual cap.
To verify that your vehicle qualifies based on U.S. final assembly, check the vehicle label at the dealership, the vehicle identification number (VIN), or the National Highway Traffic Safety Administration (NHTSA) website. You will need your vehicle's VIN when you file your tax return to claim the deduction.
Income Limits and Phase-Out
The deduction phases out for higher earners. The phase-out begins at $100,000 modified adjusted gross income (MAGI) for single filers and $200,000 for married couples filing jointly. Taxpayers with MAGI above those thresholds receive a reduced deduction, and the deduction is eliminated entirely for taxpayers with very high incomes.
Taxpayers below those thresholds can claim the full deduction up to the $10,000 cap, provided they meet all vehicle and loan requirements. The $10,000 cap applies per return regardless of filing status -- single filers and married-filing-jointly couples both have the same $10,000 annual limit.
What About Refinancing?
If you refinanced a qualifying vehicle loan, you can generally still deduct the interest -- but only on the original loan balance. If you borrowed additional money beyond the original principal when refinancing, the interest on that extra amount does not qualify. The refinanced loan must still be secured by a lien on the vehicle, and the original loan must have been for the purchase of a qualifying new U.S.-assembled vehicle after December 31, 2024.
How to Claim the Deduction
The car loan interest deduction is claimed on Schedule 1-A (Form 1040), the same form used for the no-tax-on-tips and no-tax-on-overtime deductions. Specifically, you report the qualifying interest in Part IV of Schedule 1-A and include your vehicle's VIN.
For tax year 2025, lenders were not required to issue a formal IRS form for this deduction since the OBBBA was passed mid-year. Instead, lenders provided borrowers with a simple statement showing total qualifying interest paid during 2025. Starting with tax year 2026, lenders are required to provide Form 1098 reporting your qualified vehicle loan interest, similar to the mortgage interest Form 1098 you may already receive.
Here is what to do when filing:
- Gather your interest statement from your lender (or Form 1098 for 2026 and later).
- Confirm your vehicle's VIN and verify U.S. final assembly through the NHTSA database if needed.
- Complete Schedule 1-A, Part IV, entering your qualifying interest and VIN.
- If your MAGI is above the phase-out threshold, complete Part I of Schedule 1-A to calculate your reduced deduction.
- The deduction flows to Schedule 1 and reduces your adjusted gross income on Form 1040.
Worked Dollar Example
Say you are a single filer with $75,000 MAGI. In January 2025 you bought a new truck assembled in Ohio for $45,000, financing $38,000 at 7% over 60 months. During 2025, you paid approximately $2,500 in interest on that loan.
- Vehicle qualifies: new, U.S.-assembled, personal use, loan originated after December 31, 2024
- Your MAGI of $75,000 is below the $100,000 phase-out start for single filers
- Your qualifying car loan interest deduction: $2,500
- At the 22% tax bracket, this saves you approximately $550 in federal income tax
Now say your income is $85,000 and you paid $6,000 in qualifying interest in 2026. You are still below the phase-out threshold, so you can deduct the full $6,000, saving approximately $1,320 at the 22% bracket.
If your income were $130,000, your deduction would be partially phased out since your MAGI exceeds the $100,000 single-filer threshold. You would complete Part I of Schedule 1-A to calculate the reduced amount.
What Does Not Qualify
Several common situations do not qualify for this deduction:
- Used vehicles, regardless of price or condition
- Vehicles with final assembly outside the United States
- Lease payments of any kind
- Business vehicles (those are deductible through separate business expense rules)
- Loans originated on or before December 31, 2024
- Home equity loans or other loans used to buy a car but not secured by the vehicle
Key Facts Summary
- Maximum deduction: $10,000 per return per year (same cap for single and joint filers)
- Qualifying period: tax years 2025 through 2028
- Vehicle must be: new, U.S. final assembly, personal use, loan after December 31, 2024
- Leases: do not qualify
- Above-the-line: available with standard deduction or itemized deductions
- Phase-out starts: $100,000 MAGI (single) / $200,000 MAGI (married filing jointly)
- Where to claim: Schedule 1-A, Part IV, with VIN required
- Lender reporting: interest statement for 2025; Form 1098 starting with 2026
The car loan interest deduction is one of the more straightforward OBBBA benefits for consumers, but the U.S. final assembly requirement is a real filter. Before assuming your vehicle qualifies, confirm the final assembly location using your VIN. The NHTSA has a free online tool that lets you check assembly information by VIN. If your vehicle does not clear that threshold, the deduction is not available regardless of any other factor. Use our income tax calculator to see how this deduction could affect your overall federal tax bill.