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For tax years 2025 through 2028, you can deduct up to $10,000 a year of interest on a loan for a new, US-assembled car, SUV, pickup or motorcycle that you bought for personal use. But a deduction lowers the income you pay tax on, so it saves you your tax rate on the interest, not the interest itself. On a $40,000 loan at an illustrative 7% APR over 60 months, the first 12 payments include $2,580.66 of interest. In the 12% federal bracket that cuts your tax by $309.68; in the 22% bracket, by $567.74.
That is useful money, but it is a discount on interest, not a reason to borrow. To get your own interest figure, enter your loan in the car loan calculator.
Who qualifies
Both the vehicle and the loan have to meet the rules. These come from the IRS fact sheet on the new deductions and the final regulations published in Internal Revenue Bulletin 2026-39:
| Requirement | What it means |
|---|---|
| New vehicle | The original use must start with you. Used vehicles don't qualify. |
| Vehicle type | Car, minivan, van, SUV, pickup truck or motorcycle |
| Weight | Gross vehicle weight rating (GVWR, the maximum loaded weight set by the manufacturer) under 14,000 pounds |
| Final assembly | The vehicle must have been finally assembled in the United States |
| Personal use | Business or commercial use doesn't qualify |
| Loan date | Taken out after December 31, 2024 |
| Loan purpose | Used to buy the vehicle and secured by a first lien on it |
| Leases | Lease payments don't qualify |
Four details in the final regulations matter in practice:
- Personal use is judged when you take out the loan. You need to expect to use the vehicle more than half the time for personal purposes.
- Negative equity doesn't count. If you roll the unpaid balance of a trade-in into the new loan, that part wasn't borrowed to buy the vehicle, so its interest doesn't qualify.
- Refinancing generally keeps the deduction, but only up to the balance you refinanced.
- The $10,000 cap is per return, whatever your filing status. Two qualifying car loans on one joint return share a single limit.
How to check final assembly
The IRS says you can rely on the vehicle information label (the window sticker) on the dealer's lot, which lists the final assembly point. You can also use the plant of manufacture coded into the vehicle identification number (VIN): enter the VIN in the NHTSA VIN Decoder and read the plant information. Check the actual vehicle you are buying, because a brand's home country doesn't tell you where a particular vehicle was assembled.
What the deduction is really worth
A deduction reduces your taxable income. Your saving is the deductible interest multiplied by your marginal tax rate, which is the rate charged on your last dollars of income:
Here is the $40,000 loan at an illustrative 7% APR for 60 months. The payment is $792.05 a month and total interest is $7,522.88. The 12% and 22% columns use two federal bracket rates as examples; your own rate depends on your income and filing status.
| Loan year | Interest paid | Principal repaid | Saving at 12% | Saving at 22% |
|---|---|---|---|---|
| 1 | $2,580.66 | $6,923.92 | $309.68 | $567.74 |
| 2 | $2,080.13 | $7,424.45 | $249.62 | $457.63 |
| 3 | $1,543.41 | $7,961.16 | $185.21 | $339.55 |
| 4 | $967.90 | $8,536.68 | $116.15 | $212.94 |
| 5 | $350.78 | $9,153.79 | $42.09 | $77.17 |
- The saving shrinks every year, because each payment repays principal and leaves less balance to charge interest on. How loan interest is calculated shows the mechanics.
- You still pay most of the interest. While it is deductible, a 7% loan behaves like a 5.46% loan for a 22% taxpayer and like a 6.16% loan for a 12% taxpayer.
- The $10,000 cap rarely matters. At 7% over 60 months, you would need to borrow about $155,000 before the first 12 payments held $10,000 of interest.
Key idea A deduction is a discount on interest, not a refund of it. In the 22% bracket you get back 22 cents of each interest dollar and pay the other 78.
The deduction ends after 2028
The table above assumes every year is deductible, but under current law only interest you pay in 2025 through 2028 counts. A 60-month loan taken out now runs well past that. Here is the same loan with different first-payment dates, counting interest in the year each payment is made:
| First payment | Interest paid 2025–2028 | Share of total interest | Saving at 12% | Saving at 22% |
|---|---|---|---|---|
| January 2026 | $6,204.20 | 82.5% | $744.50 | $1,364.92 |
| December 2026 | $4,810.42 | 63.9% | $577.25 | $1,058.29 |
| January 2027 | $4,660.78 | 62.0% | $559.29 | $1,025.37 |
| July 2027 | $3,685.49 | 49.0% | $442.26 | $810.81 |
| January 2028 | $2,580.66 | 34.3% | $309.68 | $567.74 |
With a first payment in December 2026, 25 payments fall inside the deductible years and 35 come after. In the 22% bracket, you pay $7,523 of interest and get $1,058 back, a net cost of $6,465. These figures assume your tax rate stays the same and the law doesn't change.
The income phase-out
The deduction shrinks once your modified adjusted gross income (MAGI) is above $100,000, or $200,000 if you are married filing jointly. For most people MAGI is simply the adjusted gross income on the return; it adds back certain income excluded for living abroad or in some US territories.
The reduction is $200 for each $1,000, or part of $1,000, above the threshold. It comes off your deductible interest after the $10,000 cap is applied, not off the cap itself, so on a typical car loan the deduction disappears quickly.
Here is a single filer with a first payment in December 2026, looking at the $2,540.27 of interest paid in 2027:
| MAGI | Reduction | Deduction left | Saving at 22% |
|---|---|---|---|
| $100,000 | $0 | $2,540.27 | $558.86 |
| $104,000 | $800 | $1,740.27 | $382.86 |
| $108,500 | $1,800 | $740.27 | $162.86 |
| $112,000 | $2,400 | $140.27 | $30.86 |
| $115,000 | $3,000 | $0.00 | $0.00 |
At $108,500, the $8,500 excess counts as nine steps, because a partial $1,000 counts as a full one. For this loan the deduction is gone once MAGI goes above $112,000. Inside the phase-out range, each extra $1,000 of income removes $200 of deduction, which at 22% adds $44 of tax on top of the normal tax on that income.
What to keep and how to claim it
- Claim it on Schedule 1-A, Part IV, which you file with Form 1040. It works whether you itemize or take the standard deduction. The IRS page on Schedule 1-A explains the form.
- Enter the VIN on your return for every year you claim the deduction. Without it, the interest doesn't qualify.
- Keep the lender's interest statement. Lenders must report the interest to the IRS and send you a statement of the interest you paid for the year (2025, the first year, had transition relief for lenders).
- Keep the purchase paperwork: the sales contract and loan agreement showing the date, amount financed and lien, plus the window sticker or a VIN decoder printout showing US final assembly.
This guide covers the general federal rules, not tax advice for your situation, so check current IRS guidance or a tax professional before you file.
Should the deduction change which car you buy?
The decision rule: don't buy a car, or borrow money, that you otherwise wouldn't because of the deduction. In practice:
- Compare total cost, not the tax break. In the December 2026 example, the whole deduction is worth $1,058.29 to a 22% taxpayer, less inside the phase-out. If a qualifying car costs more than that over a comparable one that doesn't qualify, the deduction doesn't cover the difference.
- A lower rate can beat the deduction. A 7% loan costs a 22% taxpayer 5.46% after tax only while it is deductible, so compare every quote in the car loan calculator.
- Don't stretch the term for a bigger write-off. A longer loan adds interest, and more of it lands after 2028; see 60 vs 72 vs 84-month car loans.
- Paying extra still wins. Each $1 of interest you avoid saves $1 and gives up only 22 cents of tax saving at 22%. See paying off a loan early.
- A bigger down payment still helps. Borrowing less cuts interest by more than the deduction gives back; see how much to put down on a car.
Set your budget first with how much car can I afford, and treat the deduction as a bonus if the car you chose qualifies.
A quick checklist
- Confirm the vehicle is new, under 14,000 pounds GVWR and finally assembled in the US.
- Make sure the loan buys the car and is secured by a lien on it. A lease, an unsecured personal loan or a credit card doesn't qualify.
- Find your yearly interest with the car loan calculator, or see each payment's interest in the loan calculator.
- Multiply that interest by your marginal rate, and check your MAGI against $100,000 ($200,000 joint).
- Keep the VIN, sales contract and interest statement, and claim it on Schedule 1-A, Part IV.
Frequently asked questions
Can I deduct car loan interest if I take the standard deduction?
Yes. The deduction is available whether you itemize or take the standard deduction, and you claim it on Schedule 1-A.
Does a used car or a lease qualify?
No. The original use of the vehicle has to start with you, so used vehicles don't qualify even if they were assembled in the US. Lease payments don't qualify either.
Is the $10,000 limit per car?
No. It is $10,000 per tax return, whatever your filing status, so two qualifying car loans on one joint return share a single limit.
How much will the deduction save me?
Multiply your deductible interest by your marginal tax rate. On $40,000 at 7% for 60 months, the first 12 payments save $309.68 at 12% or $567.74 at 22%, before any phase-out.
This article is for general education and is not financial advice. Rules, rates and products vary by lender and country. See our disclaimer.
