No Tax on Car Loan Interest: How to Claim This Deduction
How to qualify for and claim the new auto loan interest tax deduction of up to $10,000 annually.
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The "No Tax on Car Loan Interest" provision in the One Big Beautiful Bill Act (OBBBA) provides a tax break for some car buyers, but not all. To qualify, borrowers must meet a list of strict eligibility requirements, and those who do can deduct up to $10,000 a year for car loan interest they pay.
Here's the criteria you, and your car, will need to meet to take advantage of the auto loan interest tax deduction:
Vehicle qualifications
- New purchase. The deduction applies only to new vehicles, not used ones. It also does not include auto leases.
- U.S. assembly. The vehicle must have final assembly in the United States. You can find a new vehicle's final assembly location on its window sticker (monroney label) or through its vehicle identification number (VIN). The National Highway Traffic Safety Administration (NHTSA) provides a VIN decoder with plant of manufacture information.
- Vehicle type. Cars, minivans, vans, SUVs, pick-up trucks or motorcycles (with a gross vehicle weight rating of less than 14,000 pounds) qualify.
- Personal use. The deduction is for personal-use vehicles, excluding commercial or business vehicles.
Financing requirements
- Financing date. The vehicle loan must have originated after December 31, 2024. Currently, this is a temporary deduction available through 2028.
- Leases. Auto leases do not qualify for the deduction.
- Refinancing. The original use of the vehicle must start with the taxpayer (no used vehicles), but if that person refinances the loan, the interest would be eligible.
Income limitations
- Single filers. The deduction begins phasing out at a modified adjusted gross income (MAGI) of $100,000.
- Joint filers. Phase-out begins at a MAGI of $200,000.
- Phase-out amount. For every $1,000 of income over the single and joint filer threshold, the available deduction declines by $200.
The deduction is “above-the-line,” meaning it is available for both itemizing and non-itemizing taxpayers.
Most car buyers don't have $10,000 of annual loan interest to deduct
The intent of the auto loan interest deduction is to make cars more affordable for buyers, given that average car prices and interest rates remain high. But the benefit for most car buyers who qualify for the deduction will be limited.
Consider a buyer who finances a $50,000 vehicle with a 6.5% APR on a 60-month loan. That loan would come with a monthly payment of about $980 and total interest of roughly $8,700 over the life of the loan. In the first year, the borrower would pay around $3,200 in interest — well below the $10,000 annual cap on deductible auto loan interest.
Because this is a deduction, not a tax credit, the savings depend on the borrower’s tax bracket. For example, someone in the 22% federal tax bracket who deducts $3,200 in interest would reduce their tax bill by about $700. That benefit would shrink each year as interest payments decline, meaning the total tax savings over the life of the loan would be spread out and front-loaded, not ongoing at the same level.
That puts the deduction into perspective for most car buyers. While a few hundred dollars in tax savings may help offset high borrowing costs, it’s modest compared with the size of the loan itself. And because the auto loan interest deduction is temporary, applying only to tax years 2025 through 2028, its impact is limited to a relatively short window for buyers financing vehicles during that time.
Also, in the fourth quarter of 2025, the average monthly new car payment was $772, with about one in five new car buyers committing to $1,000+ payments, according to Edmunds.com. So, for most borrowers, the annual tax savings would be less than their monthly car payment.
How to take the auto loan interest tax deduction
For those who do qualify for the auto loan interest deduction, here is how to claim it.
Lenders will be required to provide borrowers with a statement (Form 1098) showing the total amount of auto loan interest paid for that tax year. However, because the deduction was enacted mid-year, the IRS allowed lenders to use alternative methods (such as online portals) to report vehicle loan interest for 2025. If you purchased and financed an eligible car in 2025, and did not receive a statement with total interest paid, contact your lender.
You will need the total interest amount and the vehicle's VIN to complete Schedule 1-A when filing a 2025 tax return. Schedule 1-A is used to claim four new tax deductions created by the OBBBA, including the auto loan tax deduction.
Your VIN can be found on the driver's side dashboard or doorjamb of your car, on your vehicle registration and title, and on your car insurance card and policy.
Consult a tax professional about your eligibility and current IRS guidance for the auto loan interest deduction.
» MORE: Are car prices going up or down?
Smart steps to reduce the cost of buying a car
While the auto loan interest deduction may provide some savings, there are other steps you can take to help reduce your cost when buying a car.
1. Research pricing benchmarks. Before stepping into a dealership, look up the fair market value of the vehicle you’re considering. Use online tools like Kelley Blue Book, Edmunds or NADA Guides to get a realistic idea of what you should expect to pay.
2. Understand how auto loans work. If you plan to finance, take time to learn the basics of auto loans — including how car loan length affects your total cost and how your credit profile impacts your interest rate. Being informed can help you avoid unfavorable loan terms.
3. Compare financing offers. Don’t automatically accept the first loan offer you receive. Compare rates and terms from banks, credit unions and online lenders to find the most competitive auto loan. Even a small difference in interest rate can lead to significant savings over time.
4. Use an auto loan calculator. Before applying for a loan, run the numbers using an auto loan calculator. Adjust variables like loan amount, interest rate, term and down payment to find a monthly payment that aligns with your financial goals.
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