If you financed a new car in 2025 or plan to buy one before 2028, you may be able to deduct thousands of dollars in loan interest — even if you take the standard deduction. The new car loan interest deduction, created under the One Big Beautiful Bill’s Working Families Tax Cuts, is one of the lesser-known changes for this tax season. Here’s who qualifies, how much you can deduct, and what doesn’t count.

What Is the New Car Loan Interest Deduction

For tax years 2025 through 2028, individuals can deduct interest paid on a loan used to buy a qualified vehicle for personal use. It’s part of the Working Families Tax Cuts under the One Big Beautiful Bill, and unlike many deductions, it’s available whether you itemize or take the standard deduction.

Do You Qualify

To claim the deduction, the vehicle and loan generally need to meet all of the following:

• The vehicle is new (used vehicles do not qualify) and assembled in the United States
• It’s purchased for personal use, not business
• The loan was incurred after December 31, 2024
• The vehicle is a car, minivan, van, SUV, pick-up truck, or motorcycle with a gross vehicle weight rating under 14,000 pounds
• Lease payments do not qualify — the deduction is for purchase loans only

How Much You Can Deduct

The maximum deduction is $10,000 per year. It phases out for higher earners:

• Begins phasing out above $100,000 modified adjusted gross income (MAGI) for single filers
• Begins phasing out above $200,000 MAGI for joint filers

How the Phase-Out Works in Dollars

The reduction is steeper than most people expect. Once your MAGI passes the threshold, the deduction shrinks by $200 for every $1,000 (or part of $1,000) over the line. Say you’re a single filer who paid $3,000 in interest this year on a new, U.S.-assembled SUV:

Your MAGI	Amount over $100,000	Reduction	Deduction left
$95,000	None	$0	$3,000
$102,500	$2,500 (counts as 3 steps of $1,000)	$600	$2,400
$108,000	$8,000	$1,600	$1,400
$115,000	$15,000	$3,000	$0

Joint filers run the same math starting at $200,000. Keep in mind that a deduction is not a refund. It lowers your taxable income, so its value is the deduction times your tax bracket. If your top bracket is 22%, the $3,000 deduction in the first row saves about $660, and the $1,400 deduction in the third row saves about $308. The $10,000 cap applies to interest, not to the loan balance, so most borrowers land well below it.

What Doesn’t Qualify

A few common situations are excluded from the deduction:

• Leased vehicles
• Used vehicles, even if new to you
• Vehicles with a gross vehicle weight rating of 14,000 pounds or more
• Loans for business-use vehicles

Which Parts of the Loan Count

Even on a qualifying vehicle, not every dollar financed produces deductible interest. The IRS instructions for Schedule 1-A separate the items customarily financed with a car purchase from the ones that aren’t:

Financed with the loan	Interest counts?
Purchase price of the vehicle	Yes
Sales tax and vehicle-related fees	Yes
Extended warranty or vehicle service plan	Yes
GAP insurance or waiver, credit insurance products, and accessories that are components of the vehicle	Yes, under the final rules
Negative equity rolled over from a trade-in	No
Collision or liability insurance financed into the loan (other than credit insurance)	No
A trailer	No

Two more rules trip people up. First, “personal use” means you expect to use the vehicle personally more than 50% of the time, so a rideshare driver who expects to use the car for income 15% of the time can still qualify. Second, the loan has to be secured by a first lien on the vehicle, and you can’t deduct the same interest twice: if you already wrote it off on Schedule C, you can’t claim it again on Schedule 1-A.

How to Claim It

The deduction goes on Schedule 1-A (Part IV), which feeds into your Form 1040. Interest you pay in 2026 is claimed on the return you file in early 2027. Here is the order that keeps you out of trouble:

1. Confirm final assembly in the U.S. Look at the vehicle information label (the window sticker) or run the VIN through the National Highway Traffic Safety Administration’s VIN decoder. A car sold by an American dealer but built in Mexico or Canada doesn’t qualify.
2. Write down the VIN. The IRS requires it on your return for every vehicle you claim, and no VIN means no deduction.
3. Total the interest you paid. Use your lender’s year-end statement or your monthly statements. Lenders that receive $600 or more in interest from you in a calendar year are required to report it, but the IRS gave lenders transition relief for 2025, so don’t wait on a form that may not arrive.
4. Check your MAGI against the $100,000 or $200,000 line, then apply the $200-per-$1,000 reduction if you’re over.
5. Missed it on a return you already filed? File Form 1040-X with Schedule 1-A attached. The IRS says to use line 4b on the 1040-X, and a refund claim generally has to be filed within three years of the date you filed the original return. Expect 8 to 12 weeks of processing, sometimes up to 16.

FAQ

Does refinancing a car loan count?
Generally yes. The IRS instructions say interest on a refinanced qualifying loan is eligible as long as the new loan is secured by a first lien on the same vehicle. The loan amount that counts is limited to what you still owed on the date you refinanced, so cashing out extra money doesn’t add deductible interest.

What if I bought my car before 2025?
The deduction applies to loans incurred after December 31, 2024, so vehicles financed earlier generally don’t qualify.

Final IRS Rules Are Now Out: What Changed

Treasury and the IRS published final regulations for this deduction in the Federal Register on September 8, 2026, effective November 9, 2026. They apply to tax years 2025 through 2028. Several points matter if you are buying or already paying on a loan:

• Personal use is tested once, when the loan is taken out. You must expect, at that time, that you, your spouse or a related individual will use the vehicle personally for more than 50% of the time you expect to own it. If your use changes later, the final rules say you do not have to re-test.
• The list of financed items that count is broader. It now names vehicle repair plans, warranties, GAP insurance, credit insurance, title and registration fees, and accessories that are components of the vehicle.
• Negative equity is excluded, and interest is split. If the loan includes money to pay off a trade-in, only the qualifying share of the interest counts, allocated pro rata.
• Lenders have a new form. The rules create Form 1098-VLI (Vehicle Loan Interest Statement), which shows the VIN and whether final assembly was in the U.S. For 2025, a lender statement of total interest paid was enough under IRS Notice 2025-57.

Worked Example: A Loan With Negative Equity

Assumptions: you finance $40,000 for a new U.S.-assembled sedan. $36,000 covers the vehicle, sales tax and fees. $4,000 is leftover balance from your old car (negative equity). Your first-year interest is $2,400, and your MAGI is under $100,000.

• The qualifying share of the loan is $36,000 out of $40,000, or 90%.
• Deductible interest is 90% of $2,400, or $2,160.
• If you are in the 22% bracket, the tax saving is about $475 ($2,160 x 0.22).

The final rules also contain ordering rules for down payments and trade-in value, so use these numbers as a rough guide and confirm with your lender’s statement or a tax preparer.

Which Situation Are You In?

• You bought a new, U.S.-assembled vehicle with a 2025 or later loan: gather your VIN and year-end interest statement, then claim it on Schedule 1-A.
• You are about to buy: check the final assembly location before you sign. A vehicle that was not finally assembled in the U.S. does not qualify.
• You bought used, or you lease: the deduction is not available.
• Your MAGI is near $100,000 (single) or $200,000 (joint): run the $200-per-$1,000 reduction before you count on the full amount.
• You rolled old car debt into the new loan: expect only part of your interest to count.

Related: Claim the New $6,000 Senior Tax Deduction on Schedule 1-A Before You File and Claim ‘No Tax on Tips’ and ‘No Tax on Overtime’ Before These Temporary Breaks Expire in 2028

This article is for general informational purposes and is not tax, legal, or financial advice. Deduction rules and thresholds can change with future IRS guidance. For guidance specific to your situation, consult IRS.gov or a licensed tax professional.