Is Car Loan Interest Tax Deductible?
Yes — car loan interest is now tax deductible for the first time in decades. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, allows taxpayers to deduct up to $10,000 per year in car loan interest from their federal income taxes. This new deduction applies to qualifying vehicles purchased after December 31, 2024, and is available through the 2028 tax year.
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.
How the Car Loan Interest Deduction Works
The OBBBA created a brand-new above-the-line deduction for vehicle loan interest. This means you can claim it even if you don't itemize your deductions — it reduces your adjusted gross income (AGI) directly on Schedule 1-A of your tax return.
Here's how it works: each year, you add up the interest you paid on your qualifying car loan during the tax year. The deduction is capped at $10,000 per year, regardless of how much interest you actually paid. Your lender will send you Form 1098-VLI reporting the interest amount, similar to how mortgage lenders send Form 1098 for home loan interest.
The deduction is available for tax years 2025 through 2028. After 2028, Congress would need to extend or renew the provision for it to continue.
Who Qualifies for This Deduction?
Not every car loan qualifies. To claim the car loan interest deduction, you must meet all of the following requirements:
- The vehicle must be new (not used or pre-owned)
- It must have its final assembly in the United States
- The loan must be for personal use — business vehicles don't qualify under this provision (though they may qualify under other tax rules)
- The loan must be secured by the vehicle as a first lien
- The vehicle must have been purchased after December 31, 2024
If you're unsure whether your vehicle was assembled in the U.S., check the VIN (Vehicle Identification Number). Vehicles assembled domestically typically have a VIN starting with 1, 4, or 5. Your dealer can also confirm the final assembly location.
Income Limits and Phase-Outs
The deduction isn't available to everyone at the full amount. Higher-income taxpayers face a phase-out that gradually reduces their deduction.
For single filers and heads of household, the phase-out begins at $100,000 in Modified Adjusted Gross Income (MAGI). For married couples filing jointly, it begins at $200,000. For married filing separately, it's $100,000.
The phase-out works like this: for every $1,000 your MAGI exceeds the threshold, your maximum deduction is reduced by $200. This means the deduction is completely eliminated at $150,000 for single filers and $250,000 for joint filers.
For example, a single filer earning $120,000 would have their deduction reduced by $4,000 (20 × $200), leaving a maximum deduction of $6,000 instead of $10,000.
How to Claim It on Your Tax Return
Claiming the deduction is straightforward. When you file your federal tax return, you'll report the deduction on the new Schedule 1-A, which was created specifically for OBBBA deductions. Your lender will provide Form 1098-VLI with the exact interest amount to report.
Since this is an above-the-line deduction, you don't need to itemize on Schedule A. You can take the standard deduction and still claim the car loan interest deduction.