The car loan interest deduction, explained

The short version

A 2025 tax law — Public Law 119-21, which the Treasury regulation calls the One, Big, Beautiful Bill Act and the IRS now files under “Working Families Tax Cuts” — added a new deduction to section 163(h)(4) of the Internal Revenue Code: interest you pay on a loan for a new, US-assembled personal vehicle can reduce your taxable income for tax years 2025 through 2028. The Treasury Department and the IRS published the final rules as Treasury Decision (T.D.) 10054 in the Federal Register on September 8, 2026, as the new regulation 26 CFR §1.163-16 [1][5].

The rest of this guide goes through each condition, then the arithmetic, with the worked examples the regulation itself gives. Our Does My Car Qualify? checker applies the same rules to your VIN.

Who and what qualifies

Every condition below has to be true. Most are about the loan and the way you use the car, not only about the car itself.

You

• You are an individual (a decedent’s estate or a non-grantor trust can also claim it) [2].
• When you took the loan, you expected the vehicle to be used for personal purposes — by you, your spouse or a relative — more than 50% of the time. The regulation’s own examples: 85% personal use with 15% rideshare driving counts; 60% business use does not [2].

The loan

• It was taken out after December 31, 2024, to buy the vehicle, and it is secured by a first lien on that vehicle [2].
• You are the original borrower. A loan you took over from someone else does not count, except when it passed to you because the borrower died.
• It is not a lease, not owed to a related person (a family member, for example), and not a loan for fleet sales, a commercial vehicle you don’t use personally, a salvage-title vehicle, or a vehicle bought for scrap or parts.
• Paying with a credit card generally does not create a qualifying loan; neither does an unsecured personal loan.

The vehicle

• New. The original use has to start with you, and your loan documents must treat it as new. A dealer holding a vehicle for sale does not start its original use, so a car that only a dealer has held for sale can still be new, whatever its model year [2]. Buying out your own lease does not count. If an earlier buyer returned the vehicle to the seller within 30 days, that buyer is not treated as its first user, so the vehicle can still be new for you.
• Final assembly in the United States. You may rely on the plant of manufacture reported in the VIN, or on the final assembly point printed on the label on the vehicle. Our guide How to tell where your car was assembled from its VIN shows how.
• Gross vehicle weight rating of less than 14,000 pounds — the maximum loaded weight printed on the door-jamb label, not the weight of the empty vehicle.
• A qualified type: a car, minivan, van, sport utility vehicle, pickup truck or motorcycle, made for use on public roads.

How much interest counts

What you deduct is the interest you actually paid or accrued during the tax year on the qualifying part of the loan. Interest accrues daily on the outstanding balance at the rate in your retail installment contract. Your lender’s year-end figure is usually the easiest number to use [2].

Car loans often finance more than the car. The regulation sorts those extras into two groups:

When a loan mixes both kinds, each payment is split between them in proportion — and any down payment is applied first against the parts that do not count.

The $10,000 cap

However many qualifying loans you have, no more than $10,000 of interest can be taken into account on one federal return for the year, whatever your filing status [2].

The income phase-out

After the cap, the amount is reduced by $200 for each $1,000 — or portion of $1,000 — by which your modified adjusted gross income (MAGI) is above $100,000, or above $200,000 on a joint return. It never goes below zero. MAGI here is your adjusted gross income plus any foreign earned income (section 911) and US-territory income (sections 931 and 933) that you excluded; for 2025 that is Part I of Schedule 1-A [2][6].

The words “or portion thereof” matter: even $1 over a $1,000 step costs a full $200.

Because each $1,000 costs $200, the full $10,000 disappears $50,000 above the threshold. Our arithmetic for a single filer with $10,000 of qualifying interest:

On a joint return the same steps start at $200,000, so $10,000 of interest reaches zero at $250,000.

The VIN and the lender’s statement

The VIN goes on your return. Interest does not count as qualifying interest unless you report the vehicle identification number of the purchased vehicle on your federal return for that year [2]. For 2025 the deduction is claimed on Schedule 1-A (Form 1040), Part IV: each vehicle’s VIN goes on line 22, and the deduction itself on line 30 [6].

Form 1098-VLI. A lender that receives interest of $600 or more from you in a calendar year on a qualifying loan must report it and give you a statement by January 31 of the following year [3]. Below $600 you may not get a form — use your loan statements.

For 2025 only, the IRS gave lenders transition relief in Notice 2025-57: a lender meets its obligation for 2025 if it makes a statement of the total interest received available to you — for example through an online portal, a monthly statement or an annual statement [4]. So for your 2025 return, look in your lender’s account pages if no Form 1098-VLI arrives.

Refinancing

A refinanced loan keeps the deduction only if the loan you refinanced qualified in the first place — which means that original loan, too, was taken out after December 31, 2024. Refinancing a 2024 car loan in 2025 does not create a qualifying loan. The new loan also has to be secured by a first lien on the same vehicle, and only the amount up to the old balance counts [2].

If someone else takes over the loan as part of the refinancing, it stops qualifying for them — again with an exception when that happens because the borrower died.

Common mistakes

1. A used car. A car that someone else already owned, titled or leased is used, even when a dealer sells it.
2. A lease. Lease payments are not loan interest, and buying out your lease later is not original use.
3. Trusting the first character of the VIN. The first characters identify the manufacturer. The assembly plant is in position 11 — read it, or the label on the car.
4. Refinancing a 2024 loan. The original loan must itself be from 2025 or later.
5. Counting everything in the loan. Negative equity, unrelated items and cash back are carved out.
6. Deducting the monthly payment. Only the interest part counts, not the principal.
7. Forgetting the phase-out or the cap. High income shrinks the deduction; two cars on one joint return still share one $10,000 cap.
8. Leaving out the VIN. Without it on the return, the interest does not qualify.

This guide explains the rules; it is not tax or legal advice, and the amounts here are estimates of how the rules apply. Your return, your records and the IRS decide. For your own situation, talk to a tax professional.