How Does the Car Loan Interest Deduction Work?
Thanks to the One Big Beautiful Bill Act (OBBBA), eligible taxpayers may now be able to deduct a portion of their auto loan interest on their taxes. It’s a welcome addition since the federal electric vehicle (EV) tax credits are no longer available for those who purchased after September 30, 2025. Not everyone, nor every vehicle, however, will qualify for this new, temporary tax deduction. To see if you’re eligible, keep reading to learn who qualifies and how much the deduction is worth.
Key Takeaways
This temporary tax deduction is only available for tax years 2025 through 2028.
The vehicle must be new and have had its final assembly in the United States.
If eligible, you can take the deduction whether you take the standard deduction or itemize.
How Much is The Car Loan Interest Deduction?
Eligible taxpayers may claim up to $10,000 in auto loan interest annually for tax years 2025 through 2028.
Who Qualifies For the Car Loan Interest Deduction?
Although most auto-related tax breaks are for businesses, the Car Loan Interest Deduction applies to individual taxpayers who purchase a new vehicle between January 1, 2025, and December 31, 2028. The deduction can be claimed annually, but only if the following conditions are met:
- You must not exceed the income threshold for your filing status (see chart below).
- Must be a new vehicle (used vehicles and leases are ineligible), purchased for personal use.
- The vehicle must be financed with an auto loan.
- The vehicle must weigh less than 14,000 pounds.
- The final assembly must be done in the United States.
Cars, minivans, SUVs, pickup trucks, and motorcycles that meet the above requirements are considered eligible vehicles.
Car Loan Interest Deduction Income Thresholds
The following are the maximum modified adjusted gross income (MAGI) amounts allowed to claim the full amount, as well as the phaseout limits. The deduction decreases by $200 for every $1,000 over the full credit income limit. If your MAGI is over $150,000 as a single filer ($250,000 for married filing jointly), you are ineligible for the deduction.
| Filing Status | MAGI – Full | MAGI – Partial | MAGI – Eliminated |
| Single | Up to $100,000 | $100,000 – $150,000 | Over $150,000 |
| Married Filing Jointly | Up to $200,000 | $200,000 – $250,000 | Over $250,000 |
How to Claim The Deduction
If you meet the eligibility and income requirements, you can claim the Car Loan Interest Deduction on the new Schedule 1-A, Part IV. Be sure to have the following documents, as well:
- A copy of your signed loan agreement
- Your bill of sale and VIN
- The annual interest statement from your lender (this will likely resemble a Form 1098)
Schedule 1-A should be submitted with your Form 1040 when filing your taxes for the year.
I Use My Vehicle For Personal & Business Use; Am I Still Eligible?
Vehicles that are used for both business and personal use may still be eligible for the Car Loan Interest Deduction – it’s just a bit more complicated. Since the Car Loan Interest Deduction is only eligible for personal-use vehicles, you’ll need to keep detailed records to determine how much time the vehicle is used for business or personal time. The best way to do this is to keep a mileage log. At the end of the year, add up the total miles and determine the percentage of time spent on personal use.
For example, if you drove your car a total of 39,000 miles, but only 12,000 were for personal use, that’s 30.77% (see steps 1 & 2). You would then use that percentage to determine your deduction. If you’re single and have a MAGI under $100,000, and your total interest for the year was $9,000, the total you can claim for the deduction is $2,769.30 (see step 3).
Step 1: 12,000 ÷ 39,000 = 0.307692
Step 2: 0.0307692 x 100 = 30.77%
Step 3: $9,000 X 0.3077 = $2,769.30
Can I Claim Both The Personal & Business Deduction for Loan Interest on My Tax Return?
In addition to the Car Loan Interest Deduction for your personal use. You would also be eligible to deduct a portion of your interest and other auto expenses (gas, maintenance, and insurance) using Schedule C (Form 1040). Using the previous scenario, you could either use the standard mile rate for the 27,000 business miles or the actual expenses method (business use only). Any fees would need to be factored based on the percentage of business use. For example, if your annual car insurance is $1,900, you would only be able to deduct $1,315.37 ($1,900 x 69.23%) on Schedule C.
You cannot claim the full amount of car loan interest on both Schedule 1-A and Schedule C. If the totals combined are more than you paid, the IRS is likely to flag your return and audit you.
Final Thoughts
Since the Car Loan Interest Deduction is new, it may be a good idea to consult with a tax professional when filing this year. This is especially true if you use your vehicle for both pleasure and business. Don’t make the mistake of miscalculating your total deduction and getting into trouble with the IRS.