For decades, interest on a personal car loan was not deductible. The 2025 tax law known as the One Big Beautiful Bill Act created a temporary exception: for tax years 2025 through 2028, many buyers of new vehicles can deduct up to $10,000 a year of loan interest. It is one of the most searched personal finance topics of 2026, and also one of the most misunderstood. This post explains the rules and runs the numbers. It is not tax advice; confirm your situation with a tax professional.
Who qualifies
The vehicle and the loan both have to meet the rules:
- New vehicle only. The original use must start with you. Used vehicles do not qualify.
- Final assembly in the United States. You can check the assembly plant on the vehicle’s window sticker or by decoding the VIN.
- Eligible vehicle types: cars, minivans, vans, SUVs, pickup trucks and motorcycles with a gross vehicle weight rating under 14,000 pounds.
- Personal use. The vehicle must be expected to be used for personal purposes more than half the time.
- Loan date. The loan must have been taken out after December 31, 2024, to buy the vehicle, and secured by a first lien on it.
- Leases do not qualify.
How much you can deduct
You can deduct the interest you actually paid during the year, up to $10,000. The deduction then phases out at higher incomes: it is reduced by $200 for every $1,000 of modified adjusted gross income (MAGI) above $100,000 for single filers or $200,000 for married couples filing jointly.
You do not need to itemize. The deduction is available whether you take the standard deduction or itemize, and it is claimed on Schedule 1-A, where you report the vehicle’s VIN. Lenders report the interest you paid, generally on Form 1098 or an equivalent statement.
A worked example
You buy a new, US-assembled SUV with a $40,000 loan at 7.5% for 60 months. The payment is $801.52. Using the loan amortization calculator, the interest you pay looks like this:
| Year of the loan | Interest paid |
|---|---|
| Year 1 | $2,767.67 |
| Year 2 | $2,235.87 |
| Whole loan (5 years) | $8,090.99 |
A deduction is not a credit. It lowers taxable income, so its value depends on your tax bracket:
| Federal bracket | Year-1 tax savings |
|---|---|
| 12% | about $332 |
| 22% | about $609 |
Because interest falls every year as the balance shrinks, the deduction is worth the most in the first year and less after that. It also ends after the 2028 tax year, even if your loan continues.
How the phase-out changes the answer
Using the same $2,767.67 of first-year interest, for a single filer:
- MAGI of $95,000: below the threshold, so the full $2,767.67 is deductible.
- MAGI of $110,000: $10,000 over the threshold, so the deduction is reduced by 10 × $200 = $2,000. You can deduct $767.67.
- MAGI of $114,000 or more: the reduction ($2,800) exceeds the interest paid, so the deduction is zero.
Notice that the reduction applies to the deduction you would otherwise take, not to the $10,000 cap. Borrowers with modest interest amounts lose the benefit quickly once their income passes the threshold.
Should the deduction change what you buy?
Rarely. A typical buyer saves a few hundred dollars a year in tax. That is meaningful, but it is small next to the effect of the interest rate, the loan term and the price of the vehicle. Some practical points:
- Do not take a longer or higher-rate loan to “get a bigger deduction.” You would pay a dollar of interest to save 12 to 22 cents in tax.
- Compare financing offers on total interest. A manufacturer’s 0.9% promotional rate produces little deductible interest but costs far less overall.
- Paying the loan off early still makes sense if the rate is high. Extra principal saves the full interest amount; the deduction only returns a fraction of it.
- Keep records: the purchase contract, the VIN, the lender’s interest statement and proof that the vehicle was assembled in the US.
Refinancing and the deduction
Interest on a refinanced loan can still qualify when the original purchase met the rules. If you bought a qualifying vehicle at a high rate in 2025, refinancing to a lower rate may cost you a little deduction but will save more in interest. Our guide on whether to refinance a car loan walks through the break-even math.