Since 2025, the interest on a loan for a new, US-assembled car can come off your federal taxable income, up to $10,000 a year. On a typical $40,000 loan it is worth about $1,000 in total, far less than the $10,000 cap suggests.
Here is who qualifies, how the income limit cuts it, what it is worth on a real loan, and whether it should change how you choose between a special rate and cash.
The short version
- • Up to $10,000 of interest a year, for 2025 through 2028, on a loan for a new car whose final assembly was in the US. Leases and used cars do not qualify.
- • You claim it on Schedule 1-A, whether you itemize or take the standard deduction.
- • Above $100,000 of income ($200,000 on a joint return), each $1,000 cuts $200 off the deduction. On a typical loan it is gone by about $112,500.
- • On a $40,000 loan at 7% signed now, the interest you pay through 2028 is $4,810. At a 22% tax rate that saves about $1,058.
- • It narrows the gap between a special rate and taking the cash by a few hundred dollars. It rarely changes which one wins.
Who Qualifies
The deduction covers the interest on a loan you took out to buy a new car for yourself. Every one of these has to be true (IRS):
| Rule | What It Means |
|---|---|
| A new car | Its first use is yours. Used and certified cars do not qualify. |
| Final assembly in the US | The window sticker lists the final assembly point, and NHTSA's VIN decoder shows the plant. The VIN's first character does not decide it. |
| A loan, not a lease | Lease payments do not qualify. |
| Taken out after 2024 | Originated after December 31, 2024, and secured by a first lien on the car. |
| For personal use | Used for personal purposes more than half the time. |
| The right vehicle | A car, minivan, van, SUV, pickup or motorcycle under 14,000 pounds gross vehicle weight rating. |
| The right years | Interest you pay in 2025 through 2028, up to $10,000 a year per tax return. |
Sources: the law and the IRS's final rules of September 2026, checked October 4, 2026.
Interest on the car and what you finance with it counts, including sales tax, fees, an extended warranty or GAP. Interest on negative equity from a trade-in, or on cash you take out, does not: the IRS splits the interest in proportion (final rules).
You claim it on Schedule 1-A, so you get it whether you take the standard deduction or itemize. It comes off your taxable income after your adjusted gross income is figured.
Key Takeaway
New, assembled in the US, financed, for personal use, and signed after 2024. Read the final assembly point on the window sticker before you sign: the same model can come from plants in more than one country.
The Income Limit Cuts the Deduction Itself
Above $100,000 of modified adjusted gross income, or $200,000 on a joint return, the deduction shrinks by $200 for every $1,000 (or part of $1,000) over the line. The cut comes off the deduction you would otherwise take, not just off the $10,000 cap.
| Return | Full Deduction Up To | Gone By |
|---|---|---|
| Joint | $200,000 | $250,000 |
| Any other | $100,000 | $150,000 |
Modified adjusted gross income. Head of household uses the $100,000 line. The last column is where even the full $10,000 is gone; a typical loan's deduction runs out much sooner. Sources: the law and the IRS's final rules.
Example: a single filer at $110,000
The $40,000 loan below pays $2,540 of interest in 2027. At $110,000, the income limit cuts $2,000, leaving a $540 deduction. At $112,500, nothing is left.
Because of that limit, everyone who can claim the deduction is in the 24% bracket or lower. The 32% bracket starts above the incomes where the deduction ends (IRS, 2026 brackets).
Key Takeaway
Over $100,000 ($200,000 on a joint return), the deduction drains fast: on a typical loan it is gone about $12,500 past the line. Count on it only if your income sits under the line.
What It Is Worth on a Typical Loan
Take a $40,000 loan at 7% for 60 months, signed in November 2026. It costs $7,523 in interest over five years. Only the $4,810 paid in 2026, 2027 and 2028 counts. Interest paid after 2028 does not, unless Congress extends the deduction.
| Your Tax Rate | Signed Nov 2026 | Signed Dec 2025 |
|---|---|---|
| 12% | $577 | $745 |
| 22% | $1,058 | $1,365 |
| 24% | $1,155 | $1,489 |
Federal income tax saved on the interest paid through 2028: $40,000 at 7% for 60 months, monthly payments from the month after signing. A loan signed in December 2025 has more of its interest inside the window. Computed, not quoted.
At 22%, that is about $18 a month spread over the loan. Real money, but a fraction of the interest you pay to get it.
Key Takeaway
On a typical loan, the deduction is worth your tax rate times the interest you pay through 2028: roughly $1,000 at 22%. Plan with that number, not the $10,000 cap.
Special Rate or Cash: The Deduction Rarely Flips It
Many automakers make you choose: a low special rate, or cash off the price with a regular loan. The deduction helps the cash side a little, because the regular loan carries more interest to deduct.
Example: 1.9% for 60 months, or $3,000 cash and a 7% loan
On a $40,000 car, the special rate wins by $1,997. With the deduction at a 22% tax rate, it still wins, by $1,299.
| Special Rate | Cash Needed to Win | With the Deduction |
|---|---|---|
| 0% | $6,300 | $5,600 |
| 1.9% | $4,700 | $4,100 |
| 3.9% | $2,900 | $2,500 |
The cash that makes taking it with your own 7% loan cost the same as the special rate: a $40,000 car, 60 months, signed November 2026, the deduction at a 22% tax rate through 2028. Computed and rounded to the nearest $100.
Your own rate on the cash side matters more than the deduction. Average new-car loan rates run from 4.41% at scores of 781 to 850 to 9.71% at 601 to 660 (Experian, Q2 2026). Get a quote from your bank or credit union before you choose: auto loan inquiries within 14 to 45 days of each other generally count as one (CFPB). Our guide to what each credit score costs shows the gap by brand.
Key Takeaway
Price both options with your own loan quote, then take the deduction off each. It moves the break-even by about $350 to $800. It rarely turns a losing cash offer into a winner.
Leases Do Not Qualify
Lease payments get no deduction (IRS). A lease's rent charge works like interest, but it is not interest on a loan to buy the car. If you qualify, a loan's interest through 2028 costs you your tax rate less; a lease's rent charge at the same rate does not.
Buying out your lease with a loan generally does not qualify either. The IRS's final rules say the car's first use began with the leasing company, so it is not new to you (final rules).
Key Takeaway
Compare a lease and a loan on total cost, with the deduction taken off the loan's interest through 2028. It shifts the comparison a little; it does not settle it.
How to Claim It, and What to Keep
- Schedule 1-A: the deduction goes on this new form with your Form 1040, and you enter the car's VIN.
- Form 1098-VLI: your lender sends it when you pay $600 or more of interest in a year (IRS). For 2025, lenders could give the total in an online account or a statement instead (IRS Notice 2025-57).
- The purchase contract: it shows the loan date and the lien on the car.
- The window sticker: it shows the final assembly point.
- If you refinance: a new loan secured by the same car still counts, up to the balance you refinanced. Cash you take out does not.
Electric cars
The deduction covers electric cars like any other, if they meet the rules above. The $7,500 federal credit for new electric cars ended for cars bought after September 30, 2025 (IRS).
Key Takeaway
Keep the contract, the window sticker and Form 1098-VLI together, and copy the VIN exactly onto Schedule 1-A.
Know before you sign.
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