Now is a popular time of year for people to purchase a new vehicle. What they might not know is that this new purchase could qualify for a tax benefit. Under the Working Family Tax Cuts, taxpayers may be able to deduct their car loan interest, if certain eligibility criteria are met.
Let’s go over the basic qualifications for this deduction.
Who can claim the deduction?
The deduction is available for both itemizing and non-itemizing taxpayers. The VIN must be included on the tax return for any year the deduction is claimed. The maximum annual deduction is $10,000 and phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers).
What vehicles qualify?
The vehicle type can include a car, minivan, SUV, pick-up truck, or motorcycle. Additionally, the vehicle must:
- Have a gross vehicle weight rating of less than 14,000 pounds
- Have undergone final assembly in the United States
- Be new. Used vehicles do not qualify
Ways to verify final assembly
- The information label attached to the vehicle at the dealership
- The vehicle identification number
- The National Highway Traffic Safety Administration, NHTSA VIN Decoder (verify vehicle assembly location)
What interest qualifies?
Interest must be paid on a loan that:
- Was originated after Dec. 31, 2024
- Was used to purchase a qualifying vehicle used by the taxpayer
- Was secured by a lien on the vehicle
- Was for personal use and not for business use
- Was for a personal use (non-business) vehicle
Leases are not eligible. If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible.
Frequently Asked Questions (FAQs)
Yes. This is an “above-the-line” deduction (reported on Schedule 1-A), which means it is available to all eligible taxpayers regardless of whether you claim the standard deduction or itemize your deductions.
Vehicles assembled outside the U.S. do not qualify for this deduction. To be eligible, final assembly must have taken place in the United States. You can verify this using the Monroney window sticker at the dealership, checking if the VIN starts with 1, 4, or 5, or by using the NHTSA VIN Decoder tool.
No. Neither used vehicles nor leased vehicles qualify. The vehicle must be brand new (original use begins with you), and the interest must be paid on an actual loan secured by a lien on the vehicle.
The maximum $10,000 annual deduction begins to phase out when your Modified Adjusted Gross Income (MAGI) exceeds $100,000 for single/head of household filers ($200,000 for married couples filing jointly). The deduction is completely phased out once MAGI reaches $150,000 for single filers ($250,000 for joint filers).
Starting in tax year 2026, lenders and financial institutions that receive $600 or more in qualifying vehicle loan interest will issue Form 1098-VLI to both you and the IRS, detailing your total interest paid, loan origination date, and the vehicle’s VIN.
Suresh holds a Master of Commerce (M.Com) degree and is a dedicated personal finance researcher and writer. Combining his advanced academic background in commerce with deep industry research, he covers complex topics like taxation, banking systems, credit analysis, and personal finance strategies. As the founder of Tax Assistant (taxassistant.org), Suresh is committed to translating complicated financial guidelines and economic data into simple, accurate, and actionable educational resources for everyday readers.
