Car Loan Interest Deduction

You just signed the paperwork on a new car, and now you’re staring at the monthly interest charges wondering if the new car loan interest deduction means any of it comes back to you at tax time. Or maybe you’re a tax preparer fielding client questions about a deduction you’ve seen mentioned in the news but haven’t had time to research in detail. Either way, a real change just became final, and it’s normal to feel a little uncertain about how it works. 

We’ve spent 50 years helping accounting and tax professionals navigate exactly this kind of governing-body change, so let’s walk through it calmly, together. 

Quick answer: Under OBBBA’s new car loan interest deduction, taxpayers may deduct up to $10,000 per year of interest on a loan originated after 2024 and used to buy a new, U.S.-assembled passenger vehicle for personal use, for tax years 2025 through 2028. It applies whether you itemize or take the standard deduction, phasing out once MAGI exceeds $100,000 ($200,000 married filing jointly). Final regulations take effect November 9, 2026. 

The car loan interest deduction is a new federal income tax break created by OBBBA that lets eligible individuals deduct interest paid on certain new-vehicle loans, even without itemizing deductions. The provision amended Section 163(h) of the Internal Revenue Code to add a category called qualified passenger vehicle loan interest (QPVLI), and it amended Section 63(b) so the deduction is available to taxpayers who claim the standard deduction, not just itemizers. 

OBBBA also created a new information-reporting requirement, Section 6050AA, which requires lenders to report qualifying interest to both the IRS and the borrower. The IRS finalized the rules governing all of this in TD 10054Opens in new window, published in the Federal Register at 91 FR 57214 on September 8, 2026, with an effective date of November 9, 2026. Before that, proposed regulations were issued on December 31, 2025, and Notice 2025-57Opens in new window (issued October 21, 2025) provided transition relief for the 2025 tax year, which we’ll cover later in this article. 

The deduction only applies to tax years 2025 through 2028, so it’s a temporary, targeted provision, not a permanent change to the tax code. 

Any individual taxpayer, decedent’s estate, or non-grantor trust that pays qualifying interest on a qualifying vehicle loan may claim the deduction, regardless of filing status. Business entities cannot claim it, because the deduction requires the vehicle to be used more than 50% for personal purposes. 

A common misconception is that all car loan interest is now deductible. That is not correct. The vehicle must be new, the loan must meet specific requirements, and the taxpayer’s income must fall under (or only partially above) the applicable MAGI threshold. Interest on a used-car loan, a lease, or a loan secured by something other than a first lien on the vehicle generally does not qualify. 

The deduction is available to taxpayers who itemize and to those who claim the standard deduction, which is what makes it unusual among itemized-style interest deductions. Filing status affects the income phase-out thresholds but not basic eligibility. 

A vehicle qualifies as an applicable passenger vehicle (APV) only if it is new, assembled in the United States, and meets several other statutory tests. Under Section 163(h)(4)(D) and the final regulations, an APV must have original use commence with the taxpayer, be manufactured for use on public roads, have at least two wheels, fall into one of these categories: car, minivan, van, sport utility vehicle, pickup truck, or motorcycle, be treated as a motor vehicle under the Clean Air Act, and have a gross vehicle weight rating (GVWR) under 14,000 pounds. 

A used vehicle does not qualify, even a nearly-new one, because original use must commence with the taxpayer. Taxpayers can verify a vehicle’s assembly location through the vehicle identification number (VIN) using the plant-of-manufacture data under 49 CFR 565, or through the window sticker’s final-assembly-point label. 

On the loan side, a specified passenger vehicle loan (SPVL) must be incurred after December 31, 2024, to purchase the APV, and must be secured by a first lien on the vehicle. Interest, points, certain financing fees, and amounts customarily bundled into a vehicle purchase, such as sales tax, vehicle service plans, extended warranties, and title and registration fees, can be included. Negative equity rolled over from a trade-in does not qualify, and credit card purchases generally do not qualify because credit card debt is typically unsecured. 

The maximum deduction is $10,000 per tax return, per year, regardless of filing status. If you have more than one qualifying loan, you can combine the interest across all of them before applying the $10,000 cap. 

The cap applies per return, not per vehicle or per loan, so a married couple filing jointly with two qualifying car loans still tops out at $10,000 total, not $10,000 per vehicle. If a loan is only partly used to buy an APV, such as when part of the financed amount covers a non-qualifying item, the interest must be allocated on a pro rata basis between the qualifying and non-qualifying portions. 

The deduction phases out once your MAGI exceeds $100,000 for most filers, or $200,000 for married couples filing jointly. For every $1,000 (or part of $1,000) that MAGI exceeds the applicable threshold, the deduction is reduced by $200, down to zero. 

Head of household filers use the same $100,000 threshold as single filers; the statute does not provide a separate, higher threshold for that filing status. MAGI generally means adjusted gross income under Section 62, increased by certain foreign or territorial income exclusions. For estates and non-grantor trusts, the phase-out is applied at the entity level using the estate’s or trust’s own AGI, as defined under Section 67(e). 

Lenders that receive $600 or more in qualifying interest from an individual on a single specified passenger vehicle loan in a calendar year must file an information return with the IRS and furnish a statement to the borrower. That statement is delivered on Form 1098-VLIOpens in new window, Vehicle Loan Interest Statement, and it must include the borrower’s identifying information, the interest received, the outstanding loan balance, the loan’s origination date, and the vehicle’s year, make, model, and VIN. 

Lenders below the $600 threshold may report voluntarily but are not required to. Every Form 1098-VLI must also carry a legend warning the borrower that the full amount reported may not be fully deductible, since the lender cannot know the borrower’s income or whether the $10,000 cap has already been reached through other loans. Penalties under Sections 6721 and 6722 apply for incorrect or missing filings, with existing reasonable-cause relief still available. Taxpayers claiming the deduction must include the vehicle’s VIN on their own tax return. 

The deduction applies to indebtedness incurred after December 31, 2024, for tax years 2025 through 2028, while the final regulations implementing the reporting and eligibility rules became effective on November 9, 2026. That means the deduction itself has already been available for 2025 loans, but lenders and taxpayers only recently received full final guidance on how to comply. 

Because the final rules arrived after the 2025 tax year had already started, the IRS issued Notice 2025-57 on October 21, 2025, to bridge the gap. Under that transitional guidance, a lender satisfies its 2025 reporting obligation simply by making a statement available to the borrower showing total interest received during calendar year 2025, without needing to meet the full Form 1098-VLI requirements that apply starting with 2026 interest. The IRS declined requests to extend this relief beyond 2025, noting that lenders had roughly 18 months from OBBBA’s enactment to prepare.  

The car loan interest deduction is a new interest deduction, and it is separate from vehicle-purchase tax credits like the clean vehicle credit, which reduce your tax bill based on the type of vehicle you buy rather than the financing you use. The car loan interest deduction is also unlike home mortgage interest, which is only deductible if you itemize—this new deduction is available to standard-deduction filers as well. 

A related point of confusion—because the deduction rewards U.S. final assembly rather than a specific technology (electric, hybrid, or gas), it can apply to vehicles that would not qualify for other federal vehicle tax incentives, and vice versa. Taxpayers should not assume that qualifying for one auto-related tax break automatically means they qualify for another as each provision has its own eligibility rules that must be checked independently. 

Practitioners should start by confirming three things for every client with a recent car purchase—whether the vehicle is new and U.S.-assembled, whether the loan is secured by a first lien, and whether the client’s MAGI keeps them under, or only partially into, the phase-out range. Reviewing the client’s Form 1098-VLI against these tests, rather than accepting the reported figure at face value, is essential, since the statement itself will warn that the full amount may not be deductible. 

Both EAs and CPAs can advise individual clients on this deduction, since it is a personal income tax matter within the scope of both credentials’ federal tax expertise. Our Gleim Instruct tax faculty, including Gleim Instruct Professor J.T. Eagan, DTech, EA, Clinical Assistant Professor at Purdue University, work through OBBBA changes like this one directly in our EA and CPA Exam review courses, so practitioners preparing for the EA exam or the CPA Exam are learning this material as it becomes exam-relevant, not after the fact.

Only if your loan and vehicle meet the specific OBBBA requirements—the vehicle must be new, assembled in the U.S., purchased mainly for personal use, and financed with a loan secured by a first lien taken out after December 31, 2024. You can deduct up to $10,000 of qualifying interest per year, subject to income phase-outs, even if you claim the standard deduction. 

Qualifying vehicles are new cars, minivans, vans, SUVs, pickup trucks, or motorcycles with a gross vehicle weight rating under 14,000 pounds, final assembly in the United States, and original use commencing with the buyer. You can confirm assembly location using the vehicle’s VIN through the plant-of-manufacture data or the window sticker’s final-assembly-point label. 

No. The deduction requires that original use of the vehicle commence with the taxpayer, meaning it must be new when purchased. A nearly-new vehicle, a dealer loaner not held primarily for sale, or a previously leased vehicle purchased at lease-end generally will not meet this requirement, even if the loan otherwise looks similar to a qualifying one. 

Yes. The deduction phases out by $200 for every $1,000 (or part of $1,000) that your modified adjusted gross income exceeds $100,000, or $200,000 for married couples filing jointly. Once income rises far enough above the threshold, the deduction is reduced to zero, so higher earners may receive little or no benefit even with a fully qualifying loan and vehicle. 

The deduction applies to interest on qualifying loans incurred after December 31, 2024, for tax years 2025 through 2028, while the final regulations implementing the rules took effect November 9, 2026. If your loan and vehicle meet the requirements and originated after that December 2024 date, interest can qualify even though the detailed final guidance arrived later. 

OBBBA introduced real complexity for a deduction that sounds simple on the surface, and that’s exactly the kind of governing-body change we track, decode, and build directly into our exam review content. Whether you’re an EA candidate mastering federal tax law or a CPA candidate preparing for the Regulation content on the CPA Exam, our courses are updated to reflect changes like this one as soon as they become final.