Car Loan Interest Deduction Calculator
Under the One Big Beautiful Bill Act (OBBBA), you may be able to deduct up to $10,000 in car loan interest per year on your federal taxes. Use this free calculator to estimate your deduction and tax savings for 2025-2028.
This calculator provides estimates only and should not be considered tax advice. Consult a qualified tax professional for your specific situation.
Based on the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025. This deduction is available for tax years 2025-2028.
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How Does the Car Loan Interest Deduction Work?
The OBBBA created a new above-the-line deduction for interest paid on qualifying car loans. This means you can claim the deduction whether or not you itemize your taxes. The deduction applies to interest paid on loans secured by a new, US-assembled vehicle purchased for personal use.
Key Requirements
- Vehicle must be purchased after December 31, 2024 and before January 1, 2029
- Vehicle must be new (not used) and for personal use
- Vehicle must be finally assembled in the United States
- Loan must be secured by the vehicle (first lien)
- Annual deduction is capped at $10,000 of interest paid
Who Qualifies for the Car Loan Interest Deduction?
Most individual taxpayers who purchase a new, US-assembled vehicle with a loan qualify for this deduction, subject to income limits. The vehicle cannot be used primarily for business purposes (business use vehicles have separate deduction rules).
| Requirement | Details |
|---|---|
| Vehicle Type | New vehicle, US final assembly |
| Purchase Period | Jan 1, 2025 – Dec 31, 2028 |
| Loan Type | First lien, personal use |
| Annual Cap | $10,000 |
| Tax Form | Schedule 1-A (Form 1098-VLI from lender) |
Car Loan Interest Deduction Phase-Out
The deduction phases out for higher-income taxpayers based on Modified Adjusted Gross Income (MAGI). The phaseout reduces the deduction by $200 for every $1,000 of MAGI above the threshold.
| Filing Status | Phaseout Begins | Fully Phased Out |
|---|---|---|
| Single | $100,000 | $150,000 |
| Married Filing Jointly | $200,000 | $250,000 |
| Married Filing Separately | $100,000 | $150,000 |
| Head of Household | $100,000 | $150,000 |
2025 vs 2026 Tax Year Differences for the Car Loan Interest Deduction
Even though the car loan interest deduction applies to tax years 2025 through 2028, there are practical differences between claiming it on your 2025 return versus your 2026 return that every filer should understand.
Tax Year 2025: First Year and Retroactive Application
Since the OBBBA was signed on July 4, 2025, the car loan interest deduction applies retroactively to the full 2025 tax year. If you purchased a qualifying vehicle in January 2025 and have been paying interest since then, all interest paid during the calendar year counts toward your deduction. However, IRS Form 1098-VLI — the new information return that lenders use to report qualifying vehicle loan interest — was not finalized until late 2025. Some lenders may not have issued 1098-VLI forms for early-year purchases automatically. If you do not receive a 1098-VLI, gather your loan statements showing interest paid and the vehicle's assembly origin documentation from the manufacturer's window sticker or online VIN lookup tools.
Tax Year 2026: Smoother Documentation
By 2026, lenders are fully required to issue Form 1098-VLI to borrowers and the IRS, making documentation straightforward. Tax software providers have also integrated Schedule 1-A into their products, so e-filing with the car loan interest deduction is seamless. The IRS has published additional guidance on what qualifies as “final assembly in the United States,” reducing ambiguity around vehicles with mixed domestic and foreign content. If you purchased a vehicle in late 2025 and your first loan payment was in 2026, your deduction for the 2025 tax year may be small or zero — the interest you can deduct is only what you actually paid during the calendar year, not what accrued.
Planning Across Tax Years
Because car loans front-load interest in the early years of the amortization schedule, your deductible interest will typically be highest in the first full year of the loan and decline each subsequent year. A five-year loan originated in mid-2025 might generate $6,500 of qualifying interest in 2025, $5,800 in 2026, and progressively less each year. If you are close to the income phase-out threshold, it may be worth timing other income or deductions to keep your MAGI below the limit during the years your car loan interest is highest.
State-by-State Impact of the Car Loan Interest Deduction
The car loan interest deduction under the OBBBA directly reduces your federal taxable income, but the impact on your state taxes depends on how your state handles conformity with the federal tax code.
States That Conform to Federal Tax Law
States that automatically adopt changes to the Internal Revenue Code — known as “rolling conformity” states — generally allow the same car loan interest deduction on your state return. This means you get a double benefit: federal tax savings plus state tax savings. States in this category have historically included New York, Colorado, Montana, and North Dakota, among others. However, each state legislature can decouple from specific provisions at any time.
States With Fixed-Date Conformity
Some states conform to the federal code as of a specific date. If that conformity date is before July 4, 2025, the state has not adopted the OBBBA provisions. These states would need to pass legislation to update their conformity date or independently adopt the car loan interest deduction. Check your state's department of revenue website to find out whether your state has updated its conformity date to include OBBBA provisions.
No-Income-Tax States
Residents of states without an individual income tax — including Texas, Florida, Nevada, Washington, Wyoming, Alaska, South Dakota, Tennessee, and New Hampshire — are not affected at the state level. The car loan interest deduction still saves you money on your federal return regardless of where you live.
States That Fully Decouple
A handful of states compute their income tax independently without reference to the federal code. California, for example, uses its own definition of taxable income and typically does not follow new federal deductions unless the state legislature acts separately. New Jersey and Arkansas have historically been selective about which federal deductions they adopt. If you live in one of these states, the car loan interest deduction will only benefit you at the federal level unless your state passes its own version.
Regardless of your state's conformity status, the federal car loan interest deduction is valuable on its own. At a 22% marginal federal rate, the maximum $10,000 deduction saves $2,200 in federal taxes — and if your state conforms, the total savings could be $2,700 or more depending on your state tax rate.