No tax on car loan interest: the 2026 auto loan interest deduction, who qualifies, how much

A new federal income tax deduction from the One Big Beautiful Bill Act (OBBBA) applies to tax years 2025 through 2028: up to $10,000 a year of interest paid on a loan for a new, US-assembled personal vehicle can come off your taxable income, whether or not you itemize. It's formally an exception to the general rule that personal interest isn't deductible (26 U.S.C. §163(h)(4), new paragraph (4) of the existing personal-interest subsection), and it's claimed on the new Schedule 1-A, Part IV. Every figure below comes from our auto loan interest deduction calculator, built from the statute and the 2025 Schedule 1-A worksheet.

The basics

• Deduct up to $10,000 a year of qualified passenger vehicle loan interest (QPVLI). The cap is flat — it doesn't change for single vs. joint filers (26 U.S.C. §163(h)(4)(C)).
• It phases out once your modified AGI (MAGI) passes $100,000 single, head of household, or married filing separately, or $200,000 married filing jointly.
• Married filing separately is not blocked. This is different from the tips and overtime deductions: the Schedule 1-A Part IV instructions don't carry the "if married, you must file jointly" caution that Parts II, III and V do. An MFS filer can claim it, using the same $100,000 threshold as a single filer.
• This is an above-the-line deduction — you get it whether you take the standard deduction or itemize.
• You generally need to report the vehicle's VIN on your return (Schedule 1-A, line 22), and lenders report your interest paid to you and the IRS on a new information return (Form 1098-VLI, under new 26 U.S.C. §6050AA). For 2025, IRS Notice 2025-57 gave lenders transition relief: they could satisfy the reporting requirement with statements, portals or other accurate disclosures instead of a formal 1098-VLI.

Who qualifies — the vehicle

The loan has to be for an "applicable passenger vehicle." All of these have to be true:

• New, not used — original use of the vehicle has to begin with you, the taxpayer (26 U.S.C. §163(h)(4)(D)).
• Final assembly in the United States. Not where the parts come from, and not where the brand is headquartered — where the vehicle itself was finally assembled. The IRS points taxpayers to the vehicle's VIN and the National Highway Traffic Safety Administration's VIN decoder to verify this.
• A gross vehicle weight rating (GVWR) under 14,000 lbs. This covers ordinary passenger vehicles and most light trucks, not heavy commercial trucks.
• One of six body types: car, minivan, van, sport utility vehicle, pickup truck, or motorcycle. It also has to have at least two wheels, be manufactured primarily for use on public streets, roads and highways, and be treated as a motor vehicle under Title II of the Clean Air Act.
• Personal use, not business or fleet use. Proposed Treasury regulations define this as: at loan origination, you expect to use the vehicle for personal use more than 50% of the time. A vehicle bought mainly for a business fleet, or a salvage-title or scrap/parts vehicle, doesn't qualify.

Who qualifies — the loan

• Secured by a first lien on the vehicle. An unsecured personal loan used to buy a car doesn't count, even if every other rule is met.
• Incurred (originated) after December 31, 2024. A loan you took out in 2023 or 2024 for a vehicle you're still paying off doesn't qualify, even for interest paid in 2025 or later — it's the loan's origination date that matters, not the date the interest is paid.
• Not a related-party loan — not from your spouse, a family member or a business you control in the way the related-party rules (26 U.S.C. §§267(b), 707(b)(1)) define it.
• Not a lease. Lease payments aren't loan interest; nothing here applies to a leased vehicle.
• Refinancing is allowed if the original loan met every rule above, the refinanced debt is still secured by a first lien on the same vehicle, and the deduction stays capped at the original loan balance (it doesn't grow if you refinance for more than you owed).

The phase-out math — and the rounding rule runs the opposite way from tips and overtime

Above the MAGI threshold, the deduction is cut by $200 for every $1,000 (or part of a $1,000) of MAGI over it. Schedule 1-A Part IV, line 28, divides the excess MAGI by $1,000 and says: "If the resulting number isn't a whole number, increase the result to the next higher whole number. (For example, increase 1.5 to 2, and increase 0.05 to 1.)" That's a ceiling, not a floor — the opposite of how the tips and overtime deductions round in Parts II and III of the same form (which decrease a fractional result down). Concretely: $22,700 of MAGI over the threshold is divided by $1,000 to get 22.7, which rounds up to 23, times $200 for a $4,600 cut — a single dollar of excess past a whole $1,000 mark costs you the entire next $200 step immediately, unlike the tips/overtime deductions where a partial $1,000 costs nothing until it's crossed.

Because the rounding direction and the dollar amounts are both different from the tips and overtime deductions ($200/$1,000 here vs. $100/$1,000 there; $100,000/$200,000 thresholds here vs. $150,000/$300,000 there), don't reuse either deduction's numbers for the other. At the full $10,000 cap, this deduction reaches zero once MAGI is more than $49,000 over the threshold — $149,001 or more single/head of household/MFS, $249,001 or more joint (using whole-dollar MAGI; the exact zero-point is a dollar above $49,000 of excess because of the upward rounding). If your interest paid is below the $10,000 cap to begin with, the deduction zeroes out at a lower MAGI than that, since there's less room to absorb the $200-per-step cuts.

Five worked examples

Well under the threshold: $60,000 of MAGI is nowhere near the $100,000 single threshold, so there's no phase-out, and $3,800 of interest is nowhere near the $10,000 cap — the full $3,800 is deductible.

Mid-phase-out: $11,500 of interest is capped at $10,000 first. $122,700 of MAGI is $22,700 over the $100,000 single threshold. $22,700 ÷ $1,000 = 22.7, rounded up to 23, times $200 is a $4,600 cut. $10,000 minus $4,600 leaves a $5,400 deduction.

Fully phased out: $162,000 of MAGI is $62,000 over the $100,000 head-of-household threshold — exactly 62 whole steps, so the rounding direction doesn't even matter here. $62,000 ÷ $1,000 = 62, times $200 is a $12,400 cut, more than the entire $7,500 of interest paid (which was itself under the $10,000 cap). The deduction floors at $0, even though the interest was real and the loan and vehicle qualified.

Married filing separately: MFS isn't blocked for this deduction. It uses the same $100,000 threshold as a single filer. $115,250 of MAGI is $15,250 over that threshold. $15,250 ÷ $1,000 = 15.25, rounded up to 16, times $200 is a $3,200 cut. $6,000 of interest (under the cap) minus $3,200 leaves a $2,800 deduction.

Interest well under the cap: $150,000 of joint MAGI is under the $200,000 joint threshold, so there's no phase-out at all. $6,400 of interest is well under the $10,000 cap. The deduction is simply the $6,400 actually paid — the cap only matters when interest paid exceeds $10,000, which most ordinary car loans don't.

Rules to get right

• This lowers taxable income, not your tax bill dollar-for-dollar — it's a deduction, not a credit. A $5,000 deduction in the 22% bracket saves about $1,100 of tax, not $5,000.
• The cap is per loan interest paid, not per vehicle — if you have two qualifying vehicle loans, line 22 of Schedule 1-A has room for up to two VINs, and the combined interest is still capped at $10,000 total.
• The $100,000/$200,000 thresholds, the $10,000 cap and the $200-per-$1,000 reduction are fixed dollar amounts in the statute for 2025–2028; nothing in 26 U.S.C. §163(h)(4) indexes them for inflation.
• The deduction ends after tax year 2028 unless Congress extends it (26 U.S.C. §163(h)(4)(A): taxable years beginning after December 31, 2024, and before January 1, 2029).
• A used car, a leased car, a vehicle not finally assembled in the US, a vehicle used mainly for business or fleet purposes, or an unsecured loan all fail the eligibility rules completely — not a smaller deduction, zero.
• If you're shopping for a vehicle rather than financing one you already own, the car affordability calculator and car loan vs lease calculator can help size the purchase and compare loan vs. lease before this deduction even comes into play (leasing doesn't generate deductible loan interest under this provision).

Run your own numbers in the auto loan interest deduction calculator, then see what the deduction is actually worth in tax dollars in the 2026 income tax calculator: enter your income there as your usual AGI minus this deduction amount, and it will work out the standard deduction and tax on what's left. This is an illustration of the mechanics, not tax advice; a real return has details (other deductions, credits, state tax, multiple vehicles) these examples leave out.