Car Loan Interest Deduction Guide

If you bought a new, US-assembled car, SUV, minivan, van, pickup, or motorcycle for personal use with a loan taken out after December 31, 2024, you can deduct up to $10,000 a year of the interest on your federal return for tax years 2025 through 2028. The deduction shrinks by $200 for every $1,000 (or part of $1,000) of modified AGI above $100,000, or $200,000 on a joint return, so it disappears entirely for most single filers by about $150,000 of income.

This guide walks through every requirement in the statute and the Treasury regulations, with a section for each eligible vehicle type. To turn your own loan into a dollar figure, use the car loan interest deduction calculator.

Where the deduction comes from

Section 70203 of Public Law 119-21 (the One Big Beautiful Bill Act, which the IRS now calls the Working Families Tax Cuts) added a new paragraph to the Internal Revenue Code, 26 U.S.C. §163(h)(4). Normally, interest on a personal car loan is "personal interest" and not deductible. For tax years beginning in 2025, 2026, 2027, and 2028, qualified passenger vehicle loan interest is carved out of that rule.

Treasury and the IRS proposed regulations in January 2026 and finalized them as TD 10054 on September 8, 2026. The final rules add Treasury Regulation §1.163-16 for borrowers and §1.6050AA-1 for lenders.

Two features matter for planning:

• It is not an itemized deduction. You claim it on Schedule 1-A, Part IV, and the total flows to Form 1040 line 13b. You can take it and the standard deduction at the same time.
• It does not lower your AGI. Because it comes off after AGI, it will not reduce the income figures used for other tests, such as the taxation of Social Security benefits or Medicare premium surcharges.

Requirements at a glance

All three groups of tests have to be met. Missing any single one makes the interest nondeductible.

Which vehicles qualify? A section for each type

The statute lists six vehicle types. The final regulations tie each label to Environmental Protection Agency classifications, but they deliberately dropped the EPA weight limits that would have cut out heavier SUVs, pickups, and motorcycles. The only weight test that remains is the statutory one: a gross vehicle weight rating (GVWR) under 14,000 pounds. Every type must also be built primarily for public roads, have at least two wheels, and be treated as a motor vehicle under Title II of the Clean Air Act.

Cars (sedans, coupes, hatchbacks, wagons)

Any passenger car that is new and assembled in the US qualifies, regardless of brand or price. There is no price cap and no fuel-type requirement: a gasoline sedan, a hybrid, and a battery-electric car are treated the same. Weight is never an issue for cars, which sit far below 14,000 lb GVWR. The real hurdle is assembly location — many popular sedans are imported from Mexico, Japan, Korea, or Europe. Check the specific vehicle, not the model name.

SUVs and crossovers

Compact crossovers, midsize three-row SUVs, and full-size body-on-frame SUVs all count. The proposed rules would have excluded SUVs with a GVWR above 10,000 lb; the final rules removed that limit, so even the heaviest full-size SUVs qualify as long as the GVWR stays under 14,000 lb. Several SUV nameplates are built in more than one country — the same compact model can come from Kentucky or Ontario — so a crossover is the vehicle type where VIN-level checking matters most.

Minivans

Minivans are defined by direct reference to the EPA minivan classification. Personal use is easy to satisfy for a family vehicle, but assembly is not guaranteed: at least one major minivan is assembled in Canada while another is built in Alabama. Ride-hailing or school-carpool income does not disqualify the van as long as you expected more than half of its use to be personal when you signed the loan.

Vans (passenger and cargo vans, camper vans)

Full-size passenger and cargo vans qualify if they meet the same tests, but two traps apply. First, many vans are bought for work; if you expect more than 50% business use at signing, the loan is not a personal-use loan and none of the interest is qualified passenger vehicle loan interest (you may still deduct it as a business expense). Second, check the GVWR on high-roof or extended-body versions. The final rules also confirm that a self-propelled vehicle with temporary living quarters is not disqualified just because someone can sleep in it — a camper van can qualify if it meets every other test at purchase.

Pickup trucks

Light-duty half-ton pickups qualify easily on weight. Heavy-duty three-quarter-ton and one-ton pickups are where the 14,000-lb line matters: the proposed rules would have excluded pickups over 8,500 lb GVWR, but the final rules dropped that limit, leaving only the statutory test. Read the GVWR on the driver-side door-jamb certification label; a pickup rated at exactly 14,000 lb fails because the law requires less than 14,000. A truck you bought for your contracting business, or one used mainly for farm work, fails the personal-use test.

Motorcycles

Street-legal motorcycles qualify, and the final rules removed the EPA curb-mass limit (1,499 lb) that would have excluded the heaviest touring bikes. The bike must be manufactured primarily for public roads, so dirt bikes, ATVs, side-by-sides, and other off-road machines do not qualify even if they are financed. Motorcycle loans are smaller, so the deduction is smaller in dollars, but the rules are identical: new, US-assembled, first lien, personal use.

Vehicles that never qualify

• Used vehicles, including certified pre-owned, because original use began with someone else.
• Lease buyouts. The leasing company was the first owner, and buyout loan documents rarely classify the car as new.
• Leased vehicles. Lease payments are not interest on a purchase loan.
• Salvage-title vehicles and vehicles bought for scrap or parts.
• Fleet purchases and commercial vehicles not used for personal purposes.
• Trailers, boats, and RVs that are not one of the six vehicle types. If you finance a trailer on the same contract as a truck, you must carve the trailer's share out of the loan.

What "new" means: the original-use rule

Original use starts with the first person who takes delivery after the vehicle is sold, registered, or titled. When you finance the purchase, original use starts with you only if the loan documents treat the vehicle as new — meaning the lender's own new-vehicle classification.

The final regulations settled several edge cases:

• Dealer demonstrators held primarily for sale can still be new to you, even if the dealer drove them on test drives.
• Dealer service loaners are usually not new to the next buyer, because the dealer's original use began when it put the car into service.
• A prior-model-year car sitting on the lot (for example, a 2025 model sold in 2026) still qualifies.
• A vehicle returned within 30 days by an earlier buyer does not count as used by that buyer.
• Co-buyers. If two people buy the car together and one takes delivery, original use begins with both.

How to confirm US final assembly

You may rely on either the plant of manufacture encoded in the VIN or the "Final Assembly Point" printed on the window sticker under 49 CFR 583.5. The brand's headquarters is irrelevant: a foreign brand built in South Carolina qualifies, and a Detroit brand built in Mexico does not. The step-by-step method, with decoded VIN examples, is in our US-assembled car loan tax deduction guide.

Which loans and which dollars of interest count

The loan must be a purchase loan secured by a first lien

The debt must be incurred to buy the vehicle and must be secured by a first lien on it. A personal loan, a home-equity line, or a credit card used to buy a car does not qualify because the car is not the collateral. A loan from a parent, sibling, or your own company also fails under the related-party rule.

What can be rolled into the loan

Under the regulations, the qualifying loan amount includes the vehicle price plus items customarily financed with it and directly related to it: extended warranties, service plans, sales tax, and title, registration, and documentation fees. These amounts do not count, and their share of the interest must be carved out pro rata:

• negative equity from a trade-in;
• collision and liability insurance;
• unrelated items such as a trailer or boat;
• any cash paid out to you.

Your down payment is applied first against the nonqualifying amounts. In the regulation's own example, a buyer finances a $40,000 vehicle, rolls in $6,000 of negative equity, and puts $4,000 down, for a $42,000 loan. The $4,000 down payment offsets negative equity first, so $40,000 of the loan qualifies and $2,000 does not — about 95.2% of each year's interest is deductible ($40,000 ÷ $42,000).

The final rules also clarify that points, capitalized interest, and lender fees that are characterized as interest and included on the lender's statement count as interest.

Refinancing

A refinance keeps qualifying if the new loan is secured by a first lien on the same vehicle, but only up to the old loan's outstanding balance on the refinance date. In the IRS example, a borrower with a $30,000 balance refinances into a $38,000 loan and takes $8,000 in cash; only interest on $30,000 (78.9% of the new loan) qualifies. Accrued unpaid interest rolled into the refinance can count. If you add a co-borrower when you refinance, the loan still qualifies for the original borrower but not for the new one.

Personal use is tested once, at signing

You qualify if, when you take the loan, you expect the vehicle to be used more than 50% of the time for personal purposes by you, your spouse, or certain relatives. A later change in use does not retroactively disqualify you. Commuting and work as an employee count as personal use; rideshare driving and your own business do not. If you do have some business use, the regulations let you choose whether to deduct the business share as business interest on Schedule C or as car loan interest on Schedule 1-A — but not both.

How the income phase-out works

The deduction is the smaller of your qualified interest or $10,000, reduced by $200 for each $1,000 or fraction of $1,000 by which your modified AGI exceeds $100,000 ($200,000 for married filing jointly). Head of household and married filing separately filers use the $100,000 threshold; the final regulations rejected requests for a higher head-of-household threshold. Modified AGI is your AGI plus any excluded foreign earned income or Puerto Rico and possessions income — see what MAGI means.

Schedule 1-A applies this on lines 24 through 30: cap the interest at $10,000, subtract the threshold from MAGI, divide by $1,000 and round up to the next whole number, multiply by $200, and subtract.

Worked example

Dana is single with MAGI of $112,400 and paid $3,200 of qualified interest.

1. Interest after the cap: $3,200.
2. Excess MAGI: $112,400 − $100,000 = $12,400.
3. $12,400 ÷ $1,000 = 12.4, rounded up to 13.
4. Reduction: 13 × $200 = $2,600.
5. Deduction: $3,200 − $2,600 = $600.

Because the reduction comes off your actual interest, not off the $10,000 cap, people with modest interest lose the deduction quickly once they cross the threshold.

What the deduction is worth in tax dollars

A deduction saves you your marginal rate times the amount. Using the 2026 brackets from Rev. Proc. 2025-32, a single filer with $80,000 of MAGI is in the 22% bracket. If that person paid $2,952 of interest in the first year of a $45,000, 72-month loan at 7%, the deduction is $2,952 and the federal saving is about $2,952 × 22% = $649. Later years save less because interest falls as the balance amortizes — about $2,500 in year two and $2,015 in year three on the same loan. You can model the full schedule with the amortized loan calculator.

How to claim it and what your lender sends you

1. Get the interest statement. For 2025, lenders could meet their obligation under Notice 2025-57 by making a year-end interest figure available through a portal, monthly statement, or annual statement. Starting with 2026 interest, lenders that receive $600 or more on a loan must issue Form 1098-VLI by January 31.
2. Read the 1098-VLI. Box 1 shows interest received, boxes 2a–2d show the year, make, model, and VIN, box 3a shows the origination date, box 4 shows outstanding principal, box 6 is checked if original use began with you, and box 7 is checked if final assembly occurred in the United States. The lender's checkboxes help, but eligibility remains your responsibility.
3. Complete Schedule 1-A, Part IV. Enter each VIN on line 22 (up to two vehicles on the form; see the instructions for more), with any interest already deducted on Schedule C, E, or F in column (ii).
4. Keep the file. Save the purchase contract, window sticker or VIN decode, title showing the first lien, and each year's lender statement.

Common mistakes

• Assuming a familiar American brand means US assembly. Check the individual vehicle.
• Deducting a lease. Lease payments never qualify, even if you later buy the car.
• Using the gross loan when negative equity was rolled in. Prorate the interest.
• Claiming two cars and $14,000 of interest on a joint return. The cap is $10,000 per return.
• Forgetting the round-up. The car loan phase-out rounds partial thousands up, unlike the tips and overtime phase-outs, which round down.
• Expecting a state deduction. This is a federal deduction; state conformity varies.

How it fits with the other new deductions

The car loan deduction sits beside the deductions for qualified tips, qualified overtime, and the $6,000 senior deduction, all on the same Schedule 1-A. Each has its own threshold, so a household can be fully phased out of the car deduction at $150,000 while still taking the full tips or overtime deduction. The Working Families Tax Cuts explainer compares them side by side, and the WFTC savings estimator adds them together.