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Car loan interest deduction: which loans and cars qualify

The deduction comes with conditions on the car, the loan, and your income, and because loan interest falls every year, so does what it is worth.

Published by Eigenlabs · Last reviewed · 3 min read · 3 sources · Editorial method · AI use

Work out a loan payment and its interest
ESTIMATE

Estimate your car loan interest deduction

How it is calculated: Schedule 1-A, Part IV: qualified interest capped at $10,000 per return, less $200 for each full $1,000 of MAGI over $100,000 ($200,000 joint).

ESTIMATED DEDUCTION$2,600

Interest counted $2,600 · Limit $10,000 · Income reduction $0

An estimate of the deduction, not of tax saved: the saving depends on your tax bracket, and Social Security, Medicare, and most state income taxes still apply. Not tax advice.

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01

What qualifies

The loan, the car, and the use all matter.

IRS guidance describes a deduction for interest on vehicle loans incurred after December 31, 2024, to purchase new vehicles made in America for personal use. The car must be new, final assembly must have happened in the United States, and the vehicle must be for personal use. Schedule 1-A asks for each vehicle’s identification number (VIN), and its instructions define “applicable passenger vehicle,” “final assembly in the United States,” and “personal use.”

02

The limit and the income phase-out

$10,000 per return, with a steeper phase-out than tips or overtime.

Schedule 1-A takes the smaller of your qualified interest or $10,000. If modified adjusted gross income is over $100,000 ($200,000 joint), divide the excess by $1,000, round down, and multiply by $200 — twice the rate used for tips and overtime.

Example: a single filer with MAGI of $112,400 is $12,400 over, or 12 full thousands, for a reduction of $2,400. With $2,600 of interest, the deduction is $200.

03

Your interest, and so your deduction, falls every year

Loan interest is largest at the start.

A $40,000 loan at 7% for 60 months has a payment of about $792.05. The first 12 payments include about $2,581 of interest; the next 12 about $2,080. Because interest is charged on the remaining balance, the deduction shrinks as the loan is repaid. The loan payment calculator shows total interest over the life of a loan.

04

Who can claim it

Both standard and itemizing filers.

  • The deduction applies to tax years 2025 through 2028.
  • It is available whether you take the standard deduction or itemize.
  • Lenders that receive the interest must file information returns reporting it, which is what lets borrowers claim it — keep the statement your lender sends.
  • Used vehicles do not qualify: the guidance covers loans to purchase new vehicles.
05

Before you buy a car for the deduction

Run the numbers at your own tax bracket.

At a 12% bracket, $2,581 of first-year interest is worth about $310 in tax. That is real money, but it is small next to the price difference between models, so confirm final assembly and the loan terms before choosing a car for the deduction alone.

Not tax advice. Figures follow the 2025 Schedule 1-A. Check the current year’s form and instructions, or ask a tax professional, before you file.

3 SOURCESSource ledger

Check the basis.

  1. 01Internal Revenue Service — Treasury, IRS provide guidance on the new deduction for car loan interest ↗
  2. 02Internal Revenue Service — New Schedule 1-A and Form 1040 instructions show how taxpayers will claim important deductions ↗
  3. 03Internal Revenue Service — Schedule 1-A (Form 1040) 2025, Additional Deductions (PDF) ↗

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QUESTIONS THIS ANSWERS

Questions this answers

Is car loan interest tax deductible now?

For tax years 2025 through 2028, interest on a loan taken out after December 31, 2024 to buy a new vehicle for personal use, with final assembly in the United States, can be deducted on Schedule 1-A, up to $10,000 per return, whether you itemize or not.

Which cars qualify for the car loan interest deduction?

New vehicles whose final assembly took place in the United States, bought for personal use with a loan incurred after 2024. Used vehicles do not qualify, and Schedule 1-A asks for each vehicle’s identification number (VIN).

Does the car loan interest deduction phase out?

Yes. If modified AGI is over $100,000 ($200,000 joint), the deduction is reduced by $200 for each full $1,000 over the threshold — twice the rate used for the tips and overtime deductions.