Is Car Loan Interest Tax Deductible?

The default rule is that personal interest is not deductible. The Tax Reform Act of 1986 eliminated the deduction for most consumer interest, including car loans, leaving mortgage interest as the main survivor.

That changed with the One, Big, Beautiful Bill Act (Public Law 119-21, signed July 4, 2025), which added a temporary carve-out at IRC §163(h)(4) for what the statute calls qualified passenger vehicle loan interest. Treasury and the IRS issued proposed regulations on December 31, 2025 (IR-2025-129), published in the Federal Register on January 2, 2026.

The provision is temporary: it applies to tax years 2025 through 2028 and, absent further legislation, expires after that.

The eligibility conditions are narrow, and failing any one of them disqualifies the loan entirely.

One helpful feature: the deduction is available whether you itemise or take the standard deduction. Most taxpayers take the standard deduction, so a deduction that required itemising would reach very few people.

The $10,000 cap is the number every article leads with. For almost every real buyer, it is the least relevant part of the rule.

Take an example new-car loan of $43,925 at 7.14% over 72 months (7.14% is the Federal Reserve's commercial-bank average for a 60-month new-car loan in the second quarter of 2026). First-year interest is $2,939.76 — under a third of the cap. Interest then falls every year as the balance amortises.

And because this is a deduction rather than a credit, it reduces taxable income, not tax owed. What it is worth depends on your marginal rate:

This is the part that determines whether you get anything, and it is widely reported in a way that misleads.

The deduction phases out above $100,000 of modified adjusted gross income for single filers and $200,000 for joint filers. The reduction is steep:

Commentary routinely states the deduction "disappears entirely at $150,000 single / $250,000 joint." That is true only for someone claiming the full $10,000. A $200-per-$1,000 reduction erases $10,000 over exactly $50,000 of income.

But almost nobody claims $10,000. A smaller deduction is erased far sooner:

If your income sits between roughly $100,000 and $120,000 as a single filer, or $200,000 and $220,000 jointly, run your own numbers — the deduction may be partly or entirely gone even though the headline figures suggest otherwise.

Everything above concerns personal vehicles. Business use runs on a separate, long-standing set of rules that the 2025 legislation did not create.

If you use a vehicle for business and are self-employed, interest on the vehicle loan is generally deductible in proportion to business use. Drive 60% for business and 60% of the interest is generally deductible as a business expense.

Mixed personal and business use interacts with the new personal deduction in ways the proposed regulations address specifically, and the treatment has been the subject of comment during rulemaking. If you use a vehicle both ways, this is a question for your tax professional rather than an article.

Mechanically, claiming it is straightforward.

Your lender reports the interest

From tax year 2026 onward, lenders must issue Form 1098-VLI (Vehicle Loan Interest Statement) where you paid $600 or more of qualifying interest in the year. For 2025 only, the IRS granted transition relief under Notice 2025-57, so lenders could satisfy the requirement with a plain statement showing total interest rather than the formal form.

You report it on your return

The deduction is claimed on Schedule 1-A attached to Form 1040, in the part covering car loan interest. You will need the vehicle's VIN and your total qualifying interest for the year, then apply the phase-out calculation.

Keep documentation

Retain the loan agreement, the lender's interest statement or Form 1098-VLI, and evidence of U.S. final assembly. The IRS can match the VIN you report against lender reporting and vehicle assembly data, so the substantiation trail matters.