Who can deduct car loan interest
For tax years 2025 through 2028, individuals can deduct up to $10,000 a year of interest paid on a loan used to buy a qualifying new passenger vehicle for personal use. The deduction is available to itemizers and non-itemizers alike and is claimed on Schedule 1-A. The phase-out starts at $100,000 of modified AGI, or $200,000 for joint filers, and the vehicle identification number must be included on the return for every year you claim it. The IRS reminded buyers of these rules in Tax Tip 2026-79 on November 3, 2026, as the year-end car-buying season began.
The vehicle tests
The vehicle must be new — its original use must begin with you — so used cars do not qualify even if the loan is new. Final assembly must have occurred in the United States. The IRS points to the label on the vehicle and to the NHTSA VIN decoder, which shows the plant of manufacture. Eligible types include cars, minivans, vans, SUVs, pickup trucks and motorcycles with a gross vehicle weight rating under 14,000 pounds. The loan must have originated after December 31, 2024 and be secured by a lien on the vehicle. Leases are not loans and do not qualify. The final regulations published in September 2026 and the IRS both say that if a qualifying loan is later refinanced, interest on the refinanced amount is generally eligible; the regulations explain limits when a refinance adds new borrowing.
How the calculator finds this year's interest
Lenders send an interest statement, and that figure should be used on the return. Before you have it, the calculator amortizes a fixed-rate loan: it computes the monthly payment from the amount financed, APR and term, then adds the interest portion of the payments you made this year. If the loan started in October, enter three payments starting with payment number 1; for the second calendar year, enter twelve payments starting with number 4. Early interest is highest, so the first full year usually produces the biggest deduction.
Cap and phase-out
After the $10,000 cap, the deduction is reduced by $200 for each $1,000 — or part of $1,000 — of modified AGI above $100,000 ($200,000 on a joint return). Because a partial thousand counts, the excess is rounded up: $5,500 over the threshold causes a $1,200 reduction. With $10,000 of interest, the deduction disappears $50,000 above the threshold. Note the order: the cap is applied first and the reduction second.
What it is worth
At a 22% marginal rate, $2,800 of interest is worth roughly $616 of federal income tax. That is helpful, but it rarely justifies a more expensive car or a longer loan; the interest you pay is still a cost, and the deduction only returns your marginal rate on it. Keep the purchase contract, lender statement and VIN with your tax records.