Car Loan Interest Deduction 2026: Who Qualifies

The car loan interest deduction lets you deduct up to $10,000 a year of interest on a loan for a new, US-assembled personal vehicle, for tax years 2025 through 2028. You claim it on Schedule 1-A whether or not you itemize, but it shrinks once modified adjusted gross income passes $100,000 ($200,000 for joint filers). Used cars, leases and business vehicles do not qualify.

The deduction was created by the One Big Beautiful Bill Act in July 2025 and finalized by IRS regulations. This guide explains who qualifies, how the phase-out works, how to check final assembly, a worked example, and how the personal deduction interacts with the business car expense rules that self-employed people already use. It is general information, not tax advice.

Car loan interest deduction rules at a glance

The IRS overview of the new deductions lists the core requirements:

Requirement	Rule
Tax years	2025 through 2028
Annual limit	$10,000 of interest
Income phase-out begins	$100,000 MAGI; $200,000 married filing jointly
Loan date	Originated after December 31, 2024
Vehicle	New (original use starts with you) car, minivan, van, SUV, pickup or motorcycle under 14,000 lbs GVWR
Assembly	Final assembly in the United States
Use	Personal use, not business or commercial
Security	Loan secured by a lien on the vehicle
Not eligible	Used vehicles, lease payments
How to claim	Schedule 1-A with the vehicle's VIN; no need to itemize

How the income phase-out works

The deduction is reduced by $200 for every $1,000, or fraction of $1,000, by which your modified adjusted gross income exceeds $100,000 ($200,000 for joint returns). Coverage of the new rules, such as NPR's explainer, notes that a taxpayer with the maximum $10,000 of interest loses the whole deduction at $150,000 of MAGI ($250,000 joint). Because the reduction applies to the amount you would otherwise deduct, smaller interest amounts disappear sooner.

Filing status and MAGI	Interest paid	Reduction	Deduction
Single, $90,000	$3,280	$0	$3,280
Single, $108,400	$3,280	$1,800 (9 x $200)	$1,480
Single, $120,000	$3,280	$4,000	$0
Joint, $230,000	$6,000	$6,000	$0
Joint, $180,000	$6,000	$0	$6,000

Self-employed people should note that MAGI includes net business profit, so a strong year can reduce or eliminate the deduction. Business deductions, retirement contributions and the timing of invoices all affect it.

Checking US final assembly

The vehicle must have undergone final assembly in the United States. Two ways to confirm it:

1. Window sticker. New vehicles carry a label that lists the final assembly point.
2. VIN decoder. The VIN encodes the plant of manufacture; the National Highway Traffic Safety Administration's VIN Decoder shows it.

Do not go by brand. Several models from US brands are built in Canada or Mexico, while many vehicles from Japanese, Korean and German brands are assembled in US plants. Save a screenshot of the decoder result, because you will report the VIN on your return each year you claim the deduction.

Worked example: a new pickup bought in January 2026

The figures are illustrative. Carlos, a single filer, buys a new US-assembled pickup in January 2026 for personal use. He finances $50,000 at 7% for 72 months. His monthly payment is about $852, and interest paid in 2026 comes to about $3,280.

• If his MAGI is $90,000, he deducts the full $3,280 on Schedule 1-A. At a 22% bracket that saves about $720 of federal income tax.
• If his MAGI is $108,400, he is $8,400 over the threshold. Rounded up, that is 9 increments of $1,000, so the deduction drops by $1,800 to $1,480.
• Interest falls each year as the balance shrinks, so the deduction is largest in the first year. The provision currently ends after 2028.

Personal deduction vs business car expenses

Self-employed people already had a way to deduct car loan interest: the business-use share is a business expense on Schedule C. That rule is separate from the new personal deduction.

Feature	New personal deduction (Schedule 1-A)	Business deduction (Schedule C)
Vehicle	New, US-assembled, personal use	Any vehicle used in the business
Limit	$10,000, income phase-out	Business-use share of interest, no income limit
Years	2025 to 2028	Ongoing
Reduces self-employment tax?	No	Yes
Works with standard mileage rate?	Not applicable	Yes, self-employed people can deduct the business share of interest alongside the mileage rate

You cannot deduct the same interest twice. If a vehicle is used partly for business, the business share of interest belongs on Schedule C, and the Schedule 1-A instructions and final regulations govern whether any personal share can qualify. Our comparison of standard mileage vs actual expenses explains how business car costs work, and for heavier work vehicles see the 6,000 lb vehicle deduction.

Gig drivers, rideshare and delivery workers

Many self-employed people use one vehicle for both work and life. A rideshare or delivery driver who uses a new pickup 60% for gig work and 40% personally already deducts the business share of interest on Schedule C, alongside the mileage rate or actual expenses. Whether any of the personal share also qualifies for Schedule 1-A depends on how the final regulations define personal use, so do not assume you can claim both. If the vehicle is used mainly for the gig business, the Schedule C route is usually more valuable anyway, because it also reduces self-employment tax. See our guides to DoorDash taxes and the 2026 IRS mileage rate for the business side.

Bought your car in 2025? Check your 2025 return

The deduction applies from the 2025 tax year. If you bought a qualifying new vehicle with a loan in 2025 and did not claim the interest on your 2025 return, you can generally file an amended return to claim it, within the normal time limits. Our guide to the amended tax return (Form 1040-X) explains the process. Because the IRS gave lenders transition relief for 2025 reporting, you may need to pull the interest figure from your loan statements yourself.

Should the deduction change which car you buy?

Rarely on its own. At a 22% bracket, $3,000 of interest saves about $660 a year, and only while the loan is young and your income is under the phase-out. A vehicle that costs $3,000 more or carries a higher interest rate can easily wipe that out. If you are already choosing between two similar new models, US final assembly is a tie-breaker worth checking. Paying cash, choosing a cheaper vehicle or getting a lower rate usually saves more than the deduction is worth. The provision is also temporary: unless extended, 2028 is the last year, so a 72-month loan taken in 2026 will have most of its later interest fall outside the window.

Step by step: claiming the deduction

1. Confirm eligibility: new vehicle, purchased with a loan originated after 2024, US final assembly, under 14,000 lbs GVWR, personal use, lien on the vehicle.
2. Gather the interest figure from your lender's annual statement or your loan account.
3. Find your VIN on the registration or the dashboard.
4. Estimate MAGI and apply the phase-out.
5. Complete Schedule 1-A, which also covers the tips, overtime and senior deductions, and carry the total to Form 1040.
6. Keep records: purchase contract, loan agreement, lender statements and the assembly evidence.

Common mistakes

• Claiming interest on a used car or a lease. Neither qualifies.
• Assuming brand means US assembly. Check the plant.
• Counting loan fees or principal. Only interest counts.
• Claiming a loan from 2024. The loan must be originated after December 31, 2024.
• Double-dipping business interest on Schedule C and Schedule 1-A.
• Ignoring the phase-out when estimating quarterly taxes. Our guide to how much to set aside for taxes helps you avoid surprises.

Records to keep for the car loan interest deduction

Because the deduction depends on several facts the IRS cannot see on its own, build a small file for each vehicle and keep it for at least three years after the last return on which you claim it:

• The purchase contract showing the vehicle was new and the date of purchase.
• The loan agreement showing the origination date, the lien on the vehicle and the amount financed.
• The window sticker or a VIN decoder printout showing US final assembly.
• Annual interest statements from the lender, or year-end loan summaries.
• Refinance documents, if any, showing how much of the new loan replaced the original balance.
• For self-employed owners, the mileage log that separates business from personal use.

How it fits with the other new deductions

Schedule 1-A collects the newer deductions from the same law: car loan interest, no tax on tips, no tax on overtime and the extra deduction for seniors. Self-employed workers in tipped occupations should read no tax on tips for the self-employed, and employees paid overtime can see no tax on overtime. All of them reduce taxable income for federal income tax only. Other OBBBA changes, such as the higher SALT cap for 2026, matter only if you itemize. For a full overview, see the One Big Beautiful Bill guide for small businesses.

Keeping your income clean and documented helps you manage MAGI and every deduction that depends on it. Bill clients professionally with our free invoice generator: no sign-up, and download each invoice as a PDF.