By Patricia Brandstetter, senior specialist editor at Thomson Reuters
For nearly 40 years, personal car loan interest has been off-limits as a tax deduction. That changed with the One Big Beautiful Bill Act (P.L. 119‑21, 7/4/2025), which temporarily allows the deduction under IRC Sec. 163(h)(4). For tax years 2025-2028, up to $10,000 of “Qualified Passenger Vehicle Loan Interest” (vehicle loan interest) per year is deductible – whether you itemize or take the standard deduction. Eligibility depends on the loan origination date, your income, and the type of vehicle.
If you bought a “qualified passenger vehicle” (qualifying vehicle) with a “specified passenger vehicle loan” (qualifying loan) in 2025, now is the time to claim the vehicle loan interest deduction on your tax return (Form 1040). If you plan to buy a new vehicle, you still have time: the deduction is available for loans originated through December 31, 2028.
How to qualify. The vehicle loan interest deduction is available to individuals, estates, and nongrantor trusts. To be eligible for the deduction, you must use the loan to buy a qualifying vehicle for personal use. Leased vehicles don’t qualify.
Personal use means that, at the time you take out the loan, you expect to use the vehicle for personal purposes for more than 50% of the time (“more-than-50%-personal-use test”). This is a one-time test based on your intent at the time of purchase, not an annual re-evaluation. Personal use includes use by you, your spouse, and certain relatives.
A qualifying vehicle is a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle that is manufactured primarily for use on public roads. The vehicle must also:
- have a gross vehicle weight rating (GVWR) less than 14,000 pounds;
- be brand new (used cars don’t qualify, nor do cars purchased at the end of a lease); and
- have undergone final assembly in the United States. (You can verify that a vehicle underwent final assembly in the U.S. by entering its Vehicle Identification Number (VIN) at https://www.nhtsa.gov/vin-decoder.)
A qualifying loan is a loan that is secured by a first lien on the vehicle and not owed to a related party (such as a relative or a business entity you own). The loan may be used to finance not only a vehicle’s sticker price but also other customarily financed items directly related to the vehicle, including vehicle service plans, extended warranties, sales taxes and fees.
Amount. You can deduct up to $10,000 of vehicle loan interest paid during a tax year. This limit applies per tax return, not per person or per vehicle. Only the interest portion of your loan payment is deductible, not the principal.
Phase-out. The deduction is generous but capped. It starts phasing out once your modified adjusted gross income (MAGI) exceeds $100,000 for single filers, estates, and trusts, or $200,000 for joint filers. For every $1,000 over the threshold, the deduction is reduced by $200, and it’s fully phased out at $150,000 (or $250,000 for joint filers). For example, if you’re married filing jointly with MAGI of $205,000 ($5,000 over the threshold), your maximum deduction is reduced by $1,000, leaving you with a $9,000 deduction for that year. Taxpayers with MAGI in the phaseout range should evaluate whether accelerating or deferring income might preserve more (or any) of the deduction.
Refinancing. If you’re thinking about refinancing your vehicle loan, you can generally keep the interest deduction – but there are two conditions you’ll need to meet:
- the new loan must remain a first lien secured by the same vehicle; and
- the new loan’s principal balance cannot exceed the outstanding balance of your original loan at the time of refinancing.
In other words, the deduction stays tied to your original vehicle purchase. If you roll in extra cash or bump up the loan amount when you refinance, that additional amount won’t qualify.
Mixed-use vehicles. Are you using your car for both work and personal trips? If you meet the more-than-50%-personal-use test, your loan interest may qualify for a deduction both as vehicle loan interest and as a business expense under IRC Sec. 162. You can’t double-dip on the same dollars, but you do get a choice:
- Option 1 – Keep it simple: Deduct all of the qualifying interest as vehicle loan interest, up to the $10,000 annual cap (and subject to the income phaseout).
- Option 2 – Split it strategically: Deduct the business-use portion of the interest as a business expense, and claim the remaining personal-use portion as vehicle loan interest.
The amount of vehicle loan interest available for deduction is reduced dollar-for-dollar by the amount claimed as a business expense, so splitting may be worth considering if your deduction is limited by the income phaseout.
Claiming the deduction. Ready to claim your deduction? Here’s how to do it:
Getting your interest statement. Lenders are required to send you the information you need to claim the deduction by January 31 of the following year, but the process looks slightly different depending on the tax year:
- For 2025: There’s no standardized form yet. Your lender can satisfy its reporting obligation by providing your interest total through an online portal, a monthly statement, an annual statement, or any similar method that accurately reflects what you paid. If you haven’t received anything, reach out to your lender.
- For 2026 and later: Look for Form 1098-VLI (Vehicle Loan Interest Statement), which lenders must issue by January 31 for any loan on which you paid $600 or more in interest during the year.
Filing your return. To claim the vehicle loan interest deduction, complete Form 1040, Schedule 1-A (Additional Deductions), Part IV — titled “No Tax on Car Loan Interest.” Here’s what you need to do:
- Confirm the vehicle underwent final assembly in the U.S. and enter its VIN.
- Enter the total vehicle loan interest paid for the tax year.
- Apply the phaseout calculation to arrive at your allowable deduction amount.
Keeping documentation. Keep your loan documents, lender interest statements, and proof of U.S. final assembly. This documentation will substantiate your deduction if the IRS questions it.
Bottom line. The vehicle loan interest deduction is temporary, but it’s a planning opportunity that may be worth acting on:
If you already financed a new vehicle in 2025. Confirm you meet the eligibility requirements, gather your interest total from your lender, and make sure your documentation is in order (loan terms, annual interest totals, your vehicle’s VIN, and proof of U.S. final assembly).
If you’re thinking about financing a new vehicle before 2029. Can you meet the eligibility requirements? If so, does the value of the deduction (up to $10,000 annually, subject to the income phaseout) meaningfully offset the cost of financing (including purchase price, insurance, fees, and interest)?
Note: The author wishes to acknowledge the valuable guidance and review provided by E.H. Rubinsky, senior specialist editor at Thomson Reuters.
Editor’s Note: The full article presented above is available in PPC’s Practitioners TaxAction Bulletins® as Tax Action Memo TAM-2360, first published in Issue 4 Dated February 24, 2026, along with other valuable tax practitioner articles. Contact Our Sales Team for a Subscription to Checkpoint’s bi-monthly TaxAction Bulletins, available in print and online, or to add Thomson Reuters Planner CS to your advisory toolkit.
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