Car Loan Interest Deduction 2026: Rules and Limits

If you buy a new car, SUV, van, pickup or motorcycle that had its final assembly in the United States, for personal use and with a loan taken out after 2024, you can deduct up to $10,000 of the interest a year for 2025 through 2028. The deduction shrinks by $200 for every $1,000 (or part of $1,000) of modified adjusted gross income over $100,000, or $200,000 on a joint return. On a $35,000 loan at 7%, it is worth about $450 in 2026 for a filer in the 22% bracket.

Who Qualifies

Requirement	Rule
Vehicle type	Car, minivan, van, SUV, pickup truck or motorcycle, gross vehicle weight rating under 14,000 pounds
New	Original use must start with you; used vehicles don't qualify
Made in the U.S.	Final assembly in the United States
Loan	Originated after December 31, 2024, and secured by a lien on the vehicle
Use	Personal, not business or commercial
Leases	Don't qualify
On your return	You must enter the vehicle's VIN

Checking Where the Vehicle Was Assembled

Final assembly depends on the specific vehicle, not the brand. The same model can be built in more than one country, so check the exact car you are buying. The IRS gives two ways:

The window label: the vehicle information label on a car at the dealer lists its final assembly location.
The VIN: you can rely on the plant of manufacture encoded in the vehicle identification number. The National Highway Traffic Safety Administration's free VIN decoder shows it.

Keep a screenshot or photo of either one with your tax records, since you will be entering the VIN on your return anyway.

How It's Claimed

You claim it on Schedule 1-A, Part IV, whether you itemize or take the standard deduction. The total from Schedule 1-A goes on Form 1040 line 13b, after adjusted gross income is figured. So it lowers your taxable income, not your AGI. That matters because AGI drives other limits, and this deduction won't help you get under them.

Lenders must report the interest they received to the IRS and send you a statement showing the total for the year, which gives you the figure to enter. If you later refinance a qualifying loan, the IRS says interest on the refinanced amount is generally still eligible.

How the Phase-Out Works

Schedule 1-A spells out the steps. Take your modified AGI, subtract $100,000 ($200,000 joint), divide by $1,000 and round up to the next whole number, then multiply by $200. Subtract that from your interest (up to $10,000).

Because the reduction is a flat dollar amount, a smaller interest bill disappears faster. The full $10,000 is gone at $150,000 of MAGI for a single filer, but $2,000 of interest is gone by $110,000.

Worked Example

$35,000 loan at 7% for 60 months, taken out in mid-2025 with six payments made before January 2026. Single filer, $70,000 of income, $16,100 standard deduction.

Monthly payment: $693.04.
Interest paid in 2026 (payments 7 to 18): $2,042.91. That is under the $10,000 cap, and $70,000 is under $100,000, so all of it is deductible.
Taxable income: $70,000 − $16,100 = $53,900, which drops to $51,857.09.
Federal tax: $6,570.00 falls to $6,120.56, a saving of $449.44 (22% × $2,042.91).
At $105,000 of MAGI: $5,000 over the line = 5 steps × $200 = $1,000 off, leaving $1,042.91 deductible.
At $112,500: 13 steps × $200 = $2,600, more than the interest, so the deduction is $0.

Why It's Smaller Than It Sounds

The $10,000 is a cap on the deduction, not a tax credit. What you save is the deductible interest times your tax rate. Interest is also highest early in a loan and falls each year as the balance drops, so the saving on the same loan shrinks over its life. Only a large loan at a high rate comes close to $10,000 of interest in a year.

It Isn't an EV Credit

The clean vehicle credit of up to $7,500 is not available for vehicles acquired after September 30, 2025. This deduction does not replace it. A gas truck assembled in a U.S. plant qualifies exactly as an electric car assembled there does, and an imported EV doesn't qualify at all. If you are comparing an EV with a gas vehicle, the fuel and maintenance difference will usually matter more than this deduction.

What This Doesn't Cover

This guide doesn't cover vehicles used partly for business, refinancing that takes cash out or rolls in other debt, or state tax treatment. A CPA or enrolled agent can confirm whether your loan and vehicle qualify.

Car Loan Interest Deduction Calculator

Work out this year's interest, the phase-out and the tax you save. The example above uses its formula.

EV vs. Gas Savings

Compare running costs, separate from any tax break.