The car loan interest deduction, explained

The short answer

You can 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, whether or not you itemize. Most people will never reach that ceiling; the phase-out above $100,000 of income, or $200,000 filing jointly, is what actually limits the deduction.

The eligibility rules are narrow and the phase-out rounds against you. Both are worked through below, on a real loan.

What qualifies

The eligibility list is long, and every item on it is a hard yes-or-no. The vehicle has to be new: the statute requires that its original use commence with the taxpayer, which rules out a used car even when it is bought from its first owner. Final assembly has to have happened in the United States, which is a fact about the vehicle's VIN and not about the manufacturer's nationality.

The loan has to have been taken out after 2024, has to be secured by a first lien on the vehicle, and the vehicle has to be for personal use. Refinancing does not rescue a loan signed before 2025, because the original debt still predates the cutoff. Refinancing a loan that already qualified keeps qualifying, but only up to the amount being refinanced. And a lease creates no deductible interest at all: the statute excludes lease financing by name.

Finally, the vehicle identification number goes on the return for every year the deduction is claimed, which is unusual for a deduction and worth knowing before you file.

The phase-out rounds against you

Above $100,000 of modified adjusted gross income, or $200,000 on a joint return, the deduction is reduced by $200 for each $1,000 of income over the threshold, or portion of a thousand. That last clause is the whole story: the Schedule 1-A worksheet says to round a partial thousand up, so a single dollar of income over the line already costs a full $200 of deduction.

The practical effect is that the deduction reaches zero a bit earlier than the arithmetic suggests. For a single filer it is gone at $149,001, and on a joint return at $249,001, one dollar into the last bucket rather than at the round number a thousand dollars later.

This is the mirror image of the tips and overtime deductions, whose worksheets round a partial thousand down. Same form, opposite instruction. It is the clearest example on Schedule 1-A of why these four deductions have to be read one at a time rather than by analogy to each other.

One more difference sets this deduction apart from the other three: it has no joint-return requirement. A married taxpayer filing separately can claim it, using the $100,000 threshold that single and head-of-household filers use. The tips, overtime, and senior deductions all shut a separate filer out entirely.

A worked example on a real loan

Take a $40,000 loan at 7.25% over 72 months, a fairly ordinary new-car note. Interest is front-loaded on an amortizing loan, so the first year carries the most of it.

Year one on the loan

$40,000 financed, 7.25% APR, 72 months, standard amortization

Interest paid in year one: $2,718.89
Annual cap on the deduction: $10,000.00
Interest available to deduct, before the phase-out: $2,718.89

The cap is not the binding constraint here and rarely is. At this rate and term, a loan would have to be around $145,000 before year-one interest reached $10,000. For an ordinary new-car loan, income is what decides the size of the deduction.

The same loan at three incomes, single filer, 2026 tables. Tax saved is federal income tax with the deduction subtracted against federal income tax without it.
Modified AGI	Over the threshold by	Phase-out reduction	Deduction	Federal tax saved
$80,000	$0.00	$0.00	$2,718.89	$598.16
$110,000	$10,000.00	$2,000.00	$718.89	$158.16
$115,000	$15,000.00	$2,718.89	$0.00	$0.00

The middle row, line by line

Single filer, $110,000 of modified AGI, the same $40,000 loan

Interest paid, capped: $2,718.89
Modified AGI above $100,000: $10,000.00
Reduction, $200 per $1,000 or part of one: $2,000.00
Deduction allowed: $718.89
Federal income tax saved: $158.16

The third row of the table is the useful warning. Once income is far enough over the threshold that the reduction exceeds the interest actually paid, the deduction is zero even though the loan, the vehicle, and the filer all still qualify. On a loan this size that happens well before the $149,001 point where a filer paying the full $10,000 of interest would run out.

What this does not cover

Whether your vehicle qualifies. Nothing here checks final assembly, weight rating, or the date your loan originated. The eligibility list above is the test; a build sheet or window sticker is where the answer lives.
Your actual interest. The worked example is standard amortization on a fixed rate. A real loan with fees, a variable rate, a different payment schedule, or extra principal payments will produce different interest, and the deduction follows the interest you actually paid.
State income tax. Whether a state follows this federal deduction is a state-by-state matter. Every figure here is federal.
Your MAGI. The examples treat the income shown as modified adjusted gross income directly, which is right for a wage earner and can be off for a return with other adjustments.
Advice. These are planning estimates on published 2026 tables, not tax advice.