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A new federal tax deduction may let eligible taxpayers deduct up to $10,000 of qualified car-loan interest per tax return. It applies for tax years 2025 through 2028 and can be claimed whether you use the standard deduction or itemize.
The rule is narrower than “car-loan interest is now deductible.” The vehicle generally must be new to you, assembled in the United States, below 14,000 pounds GVWR, bought for personal use, and financed with a qualifying loan secured by a first lien. Only the interest—not principal, the full monthly payment, or lease payments—counts. The IRS describes the provision in its guidance on tax cuts for working families.
What the new car-loan interest deduction does
The One, Big, Beautiful Bill Act, signed on July 4, 2025, created a temporary above-the-line deduction for qualified passenger-vehicle loan interest. It is an income deduction, not a tax credit.
For example, a $4,000 allowable deduction reduces taxable income by $4,000. It does not reduce your tax bill by $4,000. The actual tax savings depend on your marginal federal tax rate.
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Unlike traditional itemized deductions, this deduction is not claimed on Schedule A. It is calculated on Schedule 1-A, Part IV, and then carried to Form 1040, Form 1040-SR, or Form 1040-NR.
How much can you deduct?
The basic annual limit is $10,000 per tax return. A married couple filing jointly does not generally receive a $10,000 limit for each spouse; the joint return has one $10,000 maximum.
The deduction is reduced when modified adjusted gross income, or MAGI, exceeds the applicable threshold:
| Filing status | MAGI threshold | Fully phased out when MAGI exceeds |
|---|---|---|
| Single | $100,000 | $150,000 |
| Head of household | $100,000 | $150,000 |
| Married filing separately | $100,000 | $150,000 |
| Married filing jointly | $200,000 | $250,000 |
The phaseout reduces the preliminary deduction by $200 for each $1,000—or fraction of $1,000—of MAGI above the threshold. The excess is divided by $1,000 and rounded up to the next whole number before multiplying by $200, as shown on the 2025 Schedule 1-A.
For example, suppose a single taxpayer has $106,400 of MAGI and $8,000 of otherwise qualified interest. The excess over the $100,000 threshold is $6,400. Rounded up to the next $1,000, that is seven increments. The phaseout is therefore $1,400, leaving a potential deduction of $6,600.
Which vehicles qualify?
The vehicle must meet all of the following requirements:
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- It is a car, minivan, van, SUV, pickup truck, or motorcycle.
- Its gross vehicle weight rating is below 14,000 pounds.
- It is new to the taxpayer. The vehicle’s original use must begin with that taxpayer.
- Its final assembly occurs in the United States.
- It is purchased for personal use.
- The loan is secured by a first lien on the vehicle.
“New to you” is not enough. A used vehicle does not qualify even if it is purchased from a dealer and the loan originates after December 31, 2024. The original use must start with you. A vehicle bought with cash also does not qualify because there is no qualifying vehicle-loan interest.
Similarly, an American manufacturer does not automatically make a vehicle eligible. The relevant test is where final assembly occurred. Check the vehicle information label, purchase paperwork, or the VIN through the National Highway Traffic Safety Administration VIN Decoder.
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Which loans and charges qualify?
The loan must be originated after December 31, 2024, and the debt must be incurred by the taxpayer to purchase the qualifying vehicle. It must remain secured by a first lien on that vehicle. The deductible amount is qualifying interest paid or accrued during the applicable tax year, subject to the taxpayer’s accounting method and the annual limit. See IRS Topic No. 505 for general interest-deduction information.
Potentially qualifying financed amounts can include the vehicle price and customary charges directly related to the purchase, such as:
- Sales tax;
- Vehicle-related fees;
- An extended warranty; and
- A vehicle service plan.
Under the IRS proposed regulations, interest attributable to certain other amounts is excluded. Examples include:
- Negative equity rolled over from a trade-in;
- Collision or liability insurance;
- A trailer or boat;
- Unrelated goods or services; and
- Cash paid out to the borrower.
These allocation details come from proposed regulations issued by the IRS and Treasury on December 31, 2025. The statutory deduction is law, but proposed regulations should not be treated as final regulations unless finalized or otherwise changed. See the IRS proposed regulations.
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Personal use and business use
The statute requires personal use. The IRS proposed regulations generally interpret that requirement as expected personal use of more than 50% when the loan is incurred. Personal use may include use by the taxpayer, the taxpayer’s spouse, or certain related family members.
That determination is generally made when the debt is taken out. A later difference between expected and actual use does not necessarily eliminate eligibility by itself, although taxpayers should retain records supporting the original expectation.
For a qualifying mixed-use vehicle, interest normally needs to be allocated between personal and business use. The business-use portion may be deductible under the usual business rules if all those rules are satisfied. The personal-use portion may be reported on Schedule 1-A.
You cannot deduct the same interest twice. For example, interest claimed as a personal-use deduction on Schedule 1-A cannot also be claimed on Schedule C, Schedule E, or Schedule F. If expected business use exceeds personal use—for example, 60% business and 40% personal—the vehicle generally would not meet the proposed personal-use test for this Schedule 1-A deduction.
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Interest on a refinanced qualifying loan can generally remain eligible if the new loan is secured by a first lien on the same vehicle. Under the proposed rules, the refinanced principal generally cannot exceed the outstanding balance of the original qualifying loan at the time of refinancing.
A cash-out refinance is different. Interest on cash used for unrelated expenses, or on amounts added to the loan beyond the qualifying balance, may not qualify. Keep the original loan payoff statement, the refinance agreement, and any calculation separating qualifying and nonqualifying debt.
How to claim the deduction on a 2025 return
- Confirm the vehicle. Verify that it is new to you, assembled in the United States, below the weight limit, and purchased for personal use.
- Confirm the loan. Check that it originated after December 31, 2024, was used to purchase the vehicle, and is secured by a first lien.
- Get the interest figure. Use the lender’s annual statement or other reliable records. Do not use the total of your monthly payments; principal is not deductible.
- Separate business interest. If the vehicle is mixed-use, allocate interest and remove any amount already deducted on a business schedule.
- Complete Schedule 1-A, Part IV. Enter the VIN for each qualifying vehicle. Report interest already deducted on Schedule C, E, or F in the applicable column, then report the remaining qualified interest.
- Apply the limit and phaseout. Use the Schedule 1-A calculation to limit the amount to $10,000 and calculate the MAGI reduction.
- Transfer the result. Carry the final Schedule 1-A amount to Form 1040, Form 1040-SR, or Form 1040-NR, line 13b, and attach Schedule 1-A.
For the 2025 return, Schedule 1-A, Part I calculates MAGI. The threshold and phaseout calculation are in Part IV: enter the threshold on line 26, the excess on line 27, the rounded phaseout increment on line 28, the $200 multiplier on line 29, and the final deduction on line 30. The 2025 Schedule 1-A provides the form lines and instructions.
The VIN must be included for each year you claim the deduction. If you have more than two qualifying vehicles, follow the additional-VIN reporting procedure in the Schedule 1-A instructions.
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Keep records that establish both eligibility and the amount claimed:
- The lender’s statement showing interest paid during the year;
- The VIN and documentation confirming U.S. final assembly;
- The purchase contract showing the vehicle was new to you;
- The loan agreement showing the origination date and first lien;
- Records supporting expected personal use;
- A calculation allocating interest between personal and business use, if applicable; and
- Documents showing how a refinance or trade-in balance was allocated.
For 2025, lenders were allowed transitional reporting procedures. Rather than using the full future information-return process, a lender could make a statement available by January 31, 2026, through an online account, monthly statement, annual statement, or similar method. A missing special tax form does not automatically prevent a valid claim, but you still need credible documentation for the interest amount. See IRS Notice 2025-57.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.Common mistakes to avoid
| Mistake | Correct treatment |
|---|---|
| Claiming the deduction only if you itemize | Schedule 1-A allows the deduction for itemizers and standard-deduction filers. |
| Claiming $10,000 per spouse | The general limit is $10,000 per return, including a joint return. |
| Deducting the whole car payment | Only qualifying interest is potentially deductible; principal is not. |
| Using Schedule A | Use Schedule 1-A, Part IV. |
| Claiming interest on a used car | The vehicle’s original use must start with you. |
| Claiming lease payments | Lease payments are not qualified vehicle-loan interest. |
| Claiming interest on a foreign-assembled vehicle | Final assembly must occur in the United States. |
| Deducting the same interest on two schedules | Allocate the interest and claim each portion only once. |
Special filing situations
Married taxpayers filing separately use the $100,000 phaseout threshold, not the $200,000 joint-return threshold. Nonresident aliens generally are not eligible for this deduction; the IRS revised the 2025 Form 1040-NR instructions on January 29, 2026 to clarify this point. See the IRS clarification to the 2025 Form 1040-NR instructions.
Because the detailed vehicle, financed-charge, personal-use, and refinancing rules are based in part on proposed regulations, taxpayers with trade-in negative equity, cash-out refinancing, substantial business use, or unusual financing charges may need to consult a tax professional before filing.
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FAQ
Can I deduct car-loan interest if I take the standard deduction?
Yes. The qualified passenger-vehicle loan-interest deduction is claimed on Schedule 1-A and is available whether you take the standard deduction or itemize.
Is the $10,000 limit per vehicle or per spouse?
Generally, it is $10,000 per tax return per year, not $10,000 for each vehicle or each spouse. Multiple qualifying vehicles share the same return-level limit.
Does a used car qualify?
No. The vehicle must be new to the taxpayer, meaning its original use must start with that taxpayer. Buying a used vehicle after December 31, 2024 does not satisfy the rule.
Do lease payments qualify?
No. Lease payments are not interest on a qualifying vehicle loan and cannot be claimed under this deduction.
What if I use my car for both business and personal driving?
The interest generally must be allocated between the two uses. The business portion may be deductible under normal business rules, while the personal portion may qualify for Schedule 1-A if the vehicle meets the personal-use requirements. The same interest cannot be deducted twice.
Where do I report the deduction?
For a 2025 federal return, calculate it on Schedule 1-A, Part IV. The final amount is carried to Form 1040, Form 1040-SR, or Form 1040-NR, line 13b.
The Bottom Line
The new rule can provide a meaningful deduction, but it does not make every auto loan deductible. For 2025 through 2028, check the vehicle’s original-use status, U.S. final assembly, weight rating, personal-use percentage, loan date, first lien, and interest allocation before claiming anything. Then use Schedule 1-A—not Schedule A—and reduce the result for the $10,000 limit and applicable MAGI phaseout.
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