Is Auto / Car Loan Interest Tax Deductible​?

February 11, 2026 by Glynis Miller, CPA, MST

As most questions asked about tax deductions, the answer to whether you can deduct interest on your car loan is, “It depends.” As part of the recent legislation, the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, includes a new temporary deduction related to interest expense on automobile or car loans. This temporary provision outlines what can be deducted, as well as what is not eligible for deduction.
 

Summary of the car loan interest deduction

Under the OBBBA, the interest deduction is for interest a taxpayer pays on automobile loans. Under the previous tax law, interest paid on an auto loan was treated as “personal” interest and was not deductible. However, it is important to note that not all auto loans will qualify. Additionally, even if the type of auto loan qualifies, there may be limitations, such as the taxpayer’s income, that prevent a taxpayer from claiming a deductible amount.

To qualify for the deduction, the loan must be used for a qualified vehicle. Secondly, the vehicle must be purchased during the applicable tax years that begin on January 1, 2025, and end on December 31, 2028. If both the vehicle and the loan are qualified, the taxpayer can review the other provisions to determine whether the interest is deductible, up to a maximum deduction of $10,000. The deduction can be taken by taxpayers who both itemize their deductions or those who take the standard deduction.
 

What passenger vehicles qualify?

A wide range of passenger vehicles will qualify for the deduction if they are not purchased for commercial use. Most taxpayers who purchase a new car, van, minivan, sports utility vehicle, motorcycle, or pickup truck weighing less than 14,000 pounds can have a qualifying vehicle.  The qualifying vehicle must also be a passenger vehicle meeting the following guidelines:

• Its final assembly was completed in the United States. 
• It is a new vehicle, and its first use is by the taxpayer taking the deduction (used vehicles are not qualified for this deduction) 
• Its primary use is intended for public highways, streets, and roads.  
• It can be either an electric vehicle or a conventional gas-powered vehicle. 
• Taxpayers will not be allowed to deduct the interest on vehicle loans for imported vehicles, used vehicles, all-terrain vehicles, campers, or trailers.  

What loans qualify?

A qualified loan must be secured by a first lien on the qualified vehicle that originated after December 31, 2024. If a taxpayer does not include the vehicle identification number (VIN) on the tax return, the vehicle loan interest is not deductible, even if all other requirements are met. The following types of interest will not qualify:

• Interest paid on fleet sales financing 
• Interest paid on a commercial vehicle loan where the vehicle is not used for personal purposes 
• Interest paid on a leased financing agreement 
• Interest paid on loans for vehicles used for scrap or parts. 

In the event a taxpayer refinances a loan, the interest can still be deducted so long as the refinanced debt does not exceed the original debt balance the taxpayer had at the time of the refinance. In other words, if a taxpayer originally had a $40,000 vehicle loan that was refinanced when the remaining balance was $20,000, then only the interest on the remaining $20,000 would be deductible if all other requirements had been met.
 

What limitations are there for the deduction?

Although a taxpayer may have a qualifying vehicle and paid qualifying interest, the deduction can be limited or fully eliminated based on the taxpayer's income. The maximum allowable deduction cannot exceed $10,000 per tax return. A taxpayer will be allowed a deduction for any qualified interest paid in the tax year, not to exceed $10,000, if they have a modified adjusted gross income (MAGI) of $100,000 or less ($200,000 or less for a married couple filing a joint tax return).

• For example, a single taxpayer who paid $10,000 of qualifying automobile interest can deduct the full $10,000 if their respective MAGI was $100,000 or less. Likewise, a married couple filing a joint tax return could also deduct the full $10,000 if their joint MAGI was $200,000 or less.

However, the deduction will be phased out as a taxpayer's MAGI exceeds the amounts stated above. The phase-out rate is 20% or $200 for each $1,000 (or portion thereof) over the MAGI and is completely phased out when MAGI reaches $150,000 for those filing as single or a MAGI of $250,000 for those filing as a married filing joint couple.

• For example, if we consider the same facts as above, except that the single taxpayer had a MAGI of $110,000 and the couple had a MAGI of $220,000, each will need to limit their respective deductions.
   
  • In case of the single taxpayer, the $10,000 of excess MAGI is divided by $1,000, equaling 10. Then the 10 is multiplied by $200 to determine the reduction in the credit (10 X $200 = $2,000).  Since the reduction amount is $2,000, they would reduce the $10,000 of interest paid by that amount, arriving at a deduction of $8,000. 
  • In the case of the married filing joint couple, the $20,000 excess MAGI is divided by $1,000, equaling 20. Then the 20 is multiplied by $200 to determine the reduction in the credit (20 X $200 = $4,000).  Since the reduction amount is $4,000, they would reduce the $10,000 in interest paid by that amount, arriving at a deduction of $6,000.  

To determine MAGI for this deduction, adjusted gross income (AGI) is increased by the following:

• Any foreign-earned income exclusion 
• Any exclusion of certain specified possession income from within Guam, American Samoa, or the Northern Mariana Islands. 
• Any exclusion from Puerto Rico income.  

What are the reporting requirements for tax documents?

A person who receives any qualifying automobile loan interest in the normal course of their trade or business will be required to provide the payor with a tax information return if the aggregate amount received was $600 or more during the tax year.  

A new Form 1098-VLI – Vehicle Loan Interest Statement has been created, and at the time of the writing of this article was still in draft form. The form, which will be valid for filing starting in 2026, must contain all of the following information:
 

• Name and address of the individual who paid the interest 
• Interest amount received from the individual in the calendar year 
• The outstanding principal amount of the specified passenger vehicle loan as of the first day of the calendar year 
• Loan origination date 
• Applicable passenger vehicle year, make, model, and VIN that secures the loan 

Additionally, a written statement must include the name, address, and contact phone number of the party required to file the tax information form. The IRS granted temporary relief for tax year 2025 to those required to file Form 1098-VLI, as the form is still in draft. This transitional relief means that for tax year 2025, Form 1098-VLI is not required to be prepared and filed; however, the information that must be included on the form must still be sent to all taxpayers who paid qualifying interest on a qualified passenger vehicle loan.
 

Where is the deduction reported on the tax return?

The qualifying passenger vehicle loan interest deduction will be reported as an additional deduction on the new Schedule 1-A and is not considered an itemized deduction. Thus, any taxpayer who meets all the requirements of the provisions will be able to claim the deduction whether they itemize their deductions or take the standard deduction based on their filing status.
 

What is the impact?

The impact of this provision is that it allows many working Americans to reduce their taxable income by up to $10,000. The deduction is a temporary provision only available for tax years 2025 to 2028, as it is currently set to expire on December 31, 2028. This deduction should not be confused with the Federal Electric Vehicle (EV) tax credit, which expired on September 30, 2025. For tax year 2025, if a taxpayer purchased a vehicle that qualified for the EV credit and the passenger loan interest deduction, they can claim both, so long as they report all the required information on the tax return.