The Car Loan Interest Deduction: Which Loans Qualify and How Much You Can Deduct

1The four tests

Every part of the purchase has to qualify. If any one of these fails, none of the interest is deductible.

1. The vehicle is new. Its original use must begin with you. A used car does not qualify, however recent, and neither does a car you lease.
2. It was assembled in the United States. Final assembly must have taken place in the U.S. The brand does not matter: some foreign brands assemble cars here and some American brands do not.
3. It is the right kind of vehicle. A car, minivan, van, SUV, pickup truck or motorcycle with a gross vehicle weight rating under 14,000 pounds, built mainly for use on public roads.
4. The loan is the right kind. It must have been taken out after December 31, 2024, to buy the vehicle, and be secured by a first lien on it. The vehicle must be for personal use, not for a business.

Loans from a dealer, a bank or a credit union all count if they meet the tests. A personal loan or a credit card used to buy a car does not, because it is not secured by the vehicle.

2How to check where a car was assembled

The final assembly point is printed on the label on a new vehicle's window at the dealership. You can also run the vehicle identification number through the National Highway Traffic Safety Administration's VIN decoder, which shows the plant of manufacture. Do this before you buy if the deduction matters to your decision, since the same model can be built in different countries depending on the version.

Keep the window label, or a copy of the purchase documents that show it. The vehicle identification number has to be entered on your return each year you claim the deduction, so having it in your records saves a search.

3How much you can deduct

The deduction is the interest you actually paid during the year, up to $10,000. The limit is per return, not per vehicle: a married couple filing jointly with two qualifying car loans can still deduct no more than $10,000 between them. Principal, fees, insurance and extended warranties are not interest and do not count.

Most people pay far less than the cap. A $40,000 loan at 7 percent over five years carries about $2,600 of interest in the first year and less each year after, so the $10,000 limit mainly matters for expensive vehicles or high rates.

4Timing: the years that count

The deduction follows the interest you pay in each tax year, and the window is fixed. A loan taken out in 2026 can produce deductions for 2026, 2027 and 2028, and then nothing, even though most car loans run five or six years. Because interest is heaviest at the start of a loan, the first full year usually gives the largest deduction.

A car bought late in a year produces only a few months of interest for that year. A car bought in December 2024 does not qualify at all, because the loan predates the rule, even though the payments continue into the years it covers. If you were planning a purchase anyway, buying earlier in the window, rather than later, leaves more years in which the deduction applies.

5The income phase-out

The deduction is reduced by $200 for every $1,000, or part of $1,000, by which your modified adjusted gross income exceeds $100,000, or $200,000 on a joint return. Because the reduction comes off the amount you could otherwise deduct, it reaches zero at different points for different borrowers: at $150,000 for a single filer paying the full $10,000 of interest, but much sooner for someone with a smaller loan.

6How to claim it

The deduction goes on Schedule 1-A, the new form for the deductions created by the 2025 law, in the part for car loan interest. It reduces your taxable income whether you take the standard deduction or itemize, which is unusual for a personal deduction. You will need the interest paid during the year and the vehicle identification number.

Lenders are required to report qualifying interest to the IRS and give borrowers a statement of the amount, similar to the form sent for mortgage interest. If you do not receive one, your loan statements or the lender's year-end summary show the interest paid. The same schedule holds the deductions for tips, overtime and taxpayers 65 and older; our guides to tips and overtime and the senior deduction explain those.

7What it is worth, and what it is not

A deduction lowers the income that is taxed, so its value is your marginal tax rate times the amount. The same $3,000 of interest is worth $360 to someone in the 12 percent bracket and $660 to someone in the 22 percent bracket, and nothing to someone who owes no income tax. Our guide to federal tax brackets explains how to find yours.

It is also temporary and narrow. Loans for used cars, which are most car loans, get nothing, and the deduction is scheduled to end after 2028. It is a reason to check the assembly plant if you are already buying a new car, not a reason to buy one: paying a higher price or a higher rate to qualify can easily cost more than the tax saved.

8Refinancing and other situations

If you refinance a qualifying loan, interest on the new loan can generally still be deducted, as long as it remains secured by the vehicle. A loan used partly for other purposes, such as rolling the balance of an old car loan into a new one, does not qualify in full, and interest on a vehicle used in a business is handled under the business rules instead. State income taxes may or may not follow the federal deduction, so check your state's rules before counting on a state benefit.