For decades, interest on a personal car loan was not deductible. The federal tax law enacted on July 4, 2025 (Public Law 119-21) created a temporary exception: for tax years 2025 through 2028, you may be able to deduct up to $10,000 a year of interest on a loan used to buy a qualifying vehicle for personal use. If you are thinking about buying a vehicle before year-end or in the next couple of years, here is what to check before you sign.
The basics
- Up to $10,000 of interest per year for tax years 2025 through 2028.
- You do not have to itemize. The deduction is available whether you take the standard deduction or itemize. It is figured on Schedule 1-A of Form 1040.
- You must list the vehicle identification number (VIN) on your return for each year you claim the deduction.
- Income limit. The $10,000 cap is reduced by $200 for each $1,000 (or part of $1,000) of modified adjusted gross income (MAGI) over $100,000, or $200,000 on a joint return. The deduction is fully phased out at $150,000 of MAGI for single filers and $250,000 for joint filers.
Example: A single filer with MAGI of $112,500 is $12,500 over the threshold. Because partial thousands round up, that counts as 13 steps of $1,000, so the cap falls by 13 × $200 = $2,600, to $7,400.
Which loans qualify
- New debt. The loan must have been taken out after December 31, 2024.
- Used to buy the vehicle and secured by it. The loan must be for the purchase of the vehicle and secured by a first lien on it.
- Personal use. The vehicle must be for personal use, not a commercial vehicle used only in business.
- Refinancing. According to the IRS, interest on a refinanced qualifying loan is generally still eligible.
Not eligible: lease payments and lease financing, loans for fleet purchases, loans for vehicles with a salvage title or bought for scrap or parts, and loans from related parties such as a family member or your own business.
Which vehicles qualify
- New, not used. The “original use” of the vehicle must begin with you. In practice this means a new vehicle; a used car that someone else has already owned and used does not qualify.
- Type and weight. Cars, minivans, vans, SUVs, pickup trucks and motorcycles with a gross vehicle weight rating under 14,000 pounds.
- Final assembly in the United States. This is the rule that trips people up. The vehicle’s final assembly must have occurred in the U.S., regardless of the brand. The IRS says you can confirm the final assembly location on the window sticker (the dealer label), through the VIN, or with the National Highway Traffic Safety Administration’s free VIN Decoder.
What lenders will report
The law requires lenders to report qualifying interest to the IRS and to give borrowers a statement of the interest received. The IRS provided transition relief to lenders for 2025, so your first-year paperwork may have looked different. For 2026, watch for a year-end interest statement from your lender, and keep your purchase contract and loan documents, which show the loan date, the lien and the VIN.
If you also use the vehicle for business
Self-employed people who use a vehicle partly for business may already deduct a business share of their loan interest on Schedule C or similar schedules. Schedule 1-A is built to avoid double counting: you report the interest you deducted elsewhere separately, and only the remaining qualifying interest goes toward this deduction. Keep a mileage log so the split is supported.
California
California does not conform to the car loan interest deduction, according to the Franchise Tax Board’s summary of the federal law (last updated October 2026). The deduction will not reduce your California tax.
Before you buy
- Check the window sticker or VIN for U.S. final assembly before you choose a model.
- Compare a purchase loan with a lease; only a loan can produce the deduction.
- Estimate your income. If you expect MAGI well above $150,000 (single) or $250,000 (joint), the deduction will not help you.
- Remember the deduction is scheduled to end after 2028. A loan taken out now will have only a few years of deductible interest, so the tax benefit should be a bonus, not the reason to buy.
Sources
- IRS: Working Families Tax Cuts – Individuals and workers (no tax on car loan interest)
- IRS: Treasury, IRS provide guidance on the new deduction for car loan interest
- IRS Notice 2025-57
- IRS: Schedule 1-A (Form 1040), Part IV, No Tax on Car Loan Interest
- NHTSA: VIN Decoder
- Congress.gov: Text of H.R. 1 (Public Law 119-21), section 70203
- California Franchise Tax Board: Summary of Federal Income Tax Changes
If you are weighing a vehicle purchase and want to know what the deduction could be worth to you, please contact the office or call us at (858) 549-1295.
This article provides general information as of October 2026 and is not tax advice for your specific situation. Tax rules change, and the right answer depends on your facts.