Direct Answer
The OBBBA auto loan interest deduction (IRC § 163(h)(4)) lets taxpayers deduct interest paid on a loan for a qualifying new vehicle from federal taxable income for tax years 2025 through 2028. The cap is $10,000 per return per year. The vehicle must be new (not used), assembled in the United States, and purchased after December 31, 2024. Passenger vehicles only. The deduction is below the line (Schedule 1-A, Form 1040 line 13b): it reduces taxable income, not AGI or MAGI, and you do not need to itemize. It phases out starting at $100,000 MAGI for single, head of household and married-filing-separately filers ($200,000 for married filing jointly) and, with the full $10,000 cap, is eliminated once MAGI is more than $149,000 ($249,000 married filing jointly). Married filing separately filers can qualify. Claimed on Schedule 1-A.
Key Takeaways
- Maximum deduction: $10,000 per return per year under IRC § 163(h)(4). All filing statuses use the same cap.
- Qualifying vehicle: new (not used), assembled in the United States, passenger vehicle, purchased after December 31, 2024.
- Loan type: the loan must have been taken out after December 31, 2024 to purchase the qualifying vehicle and must be secured by a first lien on the vehicle. Unsecured personal loans, credit cards, home equity loans, related-party loans, and leases do not qualify.
- Available for TY 2025, 2026, 2027, and 2028 only. Expires after December 31, 2028.
- Below-the-line deduction: claim it whether you take the standard deduction or itemize. Filed on Schedule 1-A (Form 1040 line 13b), so it reduces taxable income, not AGI or MAGI.
- Phase-out begins at $100,000 MAGI (single/HOH) and $200,000 MAGI (MFJ).
- With the full $10,000 cap, the deduction is zero once MAGI is more than $149,000 (single, HOH, MFS) or $249,000 (MFJ); the phase-out counts each partial $1,000.
- Married filing separately filers qualify, with the $100,000 threshold.
- Can be combined with the IRC § 224 tip deduction and IRC § 225 overtime deduction on the same Schedule 1-A.
Quick Facts: Auto Loan Interest Deduction (Tax Year 2025)
Quick Facts, Tax Year 2025 (OBBBA)
| Item | Value | Status |
|---|
| IRC section | §163(h)(4) | Confirmed |
| Governing form | Schedule 1-A (Form 1040) | Confirmed |
| Maximum deduction | $10,000 per return per year | Confirmed |
| Phase-out threshold, single/HOH | $100,000 MAGI | Confirmed |
| Phase-out threshold, MFJ | $200,000 MAGI | Confirmed |
| Phase-out rate | $200 reduction per $1,000, or part of $1,000, over threshold | Confirmed |
| Phase-out elimination, single/HOH/MFS (full $10,000 cap) | More than $149,000 MAGI | Confirmed |
| Phase-out elimination, MFJ (full $10,000 cap) | More than $249,000 MAGI | Confirmed |
| Vehicle requirement | New, U.S.-assembled (VIN prefix 1, 4, or 5), GVWR under 14,000 lbs | Confirmed |
| Purchase date requirement | After December 31, 2024 | Confirmed |
| Loan security | Purchase loan secured by a first lien on the vehicle | Confirmed |
| Leases | Do not qualify, purchase loans only | Confirmed |
| Lender form (TY 2026+) | Form 1098-VLI | Confirmed |
| TY 2025 transitional relief | Any lender statement acceptable (IRS Notice 2025-57) | Confirmed |
| MFS filing status | Eligible; $100,000 threshold | Confirmed |
| OBBBA sunset | December 31, 2028 (TY 2025–2028) | Confirmed |
| State conformity | Varies, no federal mandate | Provisional |
How the Auto Loan Interest Deduction Is Calculated
Under the One Big Beautiful Bill Act (Pub. L. 119-21), taxpayers can deduct interest paid on a qualifying new vehicle loan from federal taxable income using IRC § 163(h)(4). The deduction is claimed on Schedule 1-A of Form 1040. For a complete explanation of qualifying vehicle requirements, loan type rules, refinancing restrictions, and how to locate your interest figure on your lender statement, see our Auto Loan Interest Deduction Guide.
Step 1: Determine your qualifying interest paid
Your lender is required to issue an annual statement showing total interest paid on the loan. Starting with TY 2026, lenders must issue Form 1098-VLI (Vehicle Loan Interest Statement). For TY 2025 (transitional year), lenders may satisfy this requirement with any statement, annual, monthly, or via online portal, showing total interest paid by January 31, 2026. Use only the interest allocable to the qualifying new vehicle loan. If you have multiple auto loans, use only the interest from the loan used to purchase a qualifying vehicle.
Step 2: Apply the $10,000 cap
The deductible amount is the lesser of your actual qualifying interest paid or $10,000. The cap is per return, not per vehicle. If you purchased two qualifying vehicles in TY 2025, your combined deductible interest is still capped at $10,000 total across both loans.
Step 3: Apply the phase-out (if applicable)
If your MAGI exceeds $100,000 (single, head of household or married filing separately) or $200,000 (married filing jointly), the deduction is reduced. For every $1,000 (or part of $1,000) of MAGI above the threshold, the deductible amount is reduced by $200. With the full $10,000 cap, the deduction is eliminated once MAGI is more than $149,000 for single, HOH and MFS filers, and more than $249,000 for MFJ filers.
Step 4: Calculate your income tax savings
Multiply your final deductible amount by your federal marginal income tax rate. A single filer in the 22% bracket with $5,000 in qualifying loan interest and MAGI below the phase-out threshold saves $1,100 in federal income tax.
Mixed Business and Personal Use
Under the final regulations (T.D. 10054), the vehicle must be bought for personal use: you must expect to use it for personal purposes more than 50% of the time you own it, tested when the loan is taken out. Use in your work as an employee counts as personal use; only use in your own trade or business (such as self-employment) or for producing income counts against you. If it passes, you do not have to split the interest: you can deduct all of it on Schedule 1-A, or deduct the business share on Schedule C and the rest on Schedule 1-A. You cannot deduct the same interest on both.
For example: with $8,000 of interest on a vehicle expected to be driven 70% personal and 30% business, you can enter all $8,000 here, or put $2,400 on Schedule C and enter $5,600 here. A vehicle expected to be driven 60% in your own trade or business (for example, as a self-employed contractor) fails the personal-use test, and none of its interest qualifies for Schedule 1-A.
Source: final regulations, T.D. 10054 (Internal Revenue Bulletin 2026-39), §1.163-16. Taxpayers with business use should compare both treatments; a business deduction can also reduce self-employment tax. Confirmed
Qualifying Vehicle Requirements
All four of the following requirements must be met for the vehicle loan interest to qualify under IRC § 163(h)(4).
- New vehicle: The vehicle must be new at the time of purchase. Used, pre-owned, and certified pre-owned vehicles do not qualify, even if assembled in the United States.
- U.S.-assembled: The vehicle must be finally assembled in the United States. Assembly location is determined by the vehicle identification number (VIN). Your dealer or manufacturer can confirm assembly location. Vehicles assembled in Canada or Mexico do not qualify.
- Passenger vehicle (under 14,000 lbs GVWR): The vehicle must have a gross vehicle weight rating (GVWR) of less than 14,000 lbs. This includes standard cars, crossovers, SUVs, minivans, and most pickup trucks. Medium-duty and heavy-duty commercial trucks at or above 14,000 lbs GVWR are excluded.
- Purchased after December 31, 2024: The purchase date determines eligibility. Vehicles purchased before January 1, 2025 do not qualify, even if the loan extends into TY 2025 or later tax years. Refinancing a loan on a pre-2025 vehicle does not create a new qualifying purchase date.
The deduction covers interest on the loan used to purchase the qualifying vehicle. Loan terms, interest rate, and lender type do not affect eligibility as long as the vehicle qualifies. Leases are not loans and do not qualify.
Phase-Out: How It Works Above $100,000
The phase-out reduces the deduction for higher-income filers. The reduction is steep: $200 for every $1,000, or part of $1,000, of MAGI above the threshold. Because the cap is $10,000, the deduction reaches zero once MAGI is more than $49,000 above the threshold: above $149,000 for single, HOH and MFS filers, and above $249,000 for MFJ filers.
Phase-Out Example: Single Filer, $120,000 MAGI
MAGI above $100,000 threshold$20,000
Phase-out reduction (20 steps × $200)$4,000
Reduced cap after phase-out$6,000
Qualifying interest paid$4,800
Final deductible amount$4,800
In this example, the phase-out reduces the $10,000 cap to $6,000. The filer's actual interest of $4,800 is below the reduced cap, so the phase-out has no practical effect. The phase-out only reduces actual savings when qualifying interest paid is close to or above the reduced cap.
Phase-Out Example: Single Filer, $130,000 MAGI
MAGI above $100,000 threshold$30,000
Phase-out reduction (30 steps × $200)$6,000
Reduced cap after phase-out$4,000
Qualifying interest paid$7,200
Final deductible amount (capped at reduced cap)$4,000
Phase-Out Example: MFJ, $220,000 MAGI
MAGI above $200,000 threshold$20,000
Phase-out reduction (20 steps × $200)$4,000
Reduced cap after phase-out$6,000
Qualifying interest paid$5,500
Final deductible amount (capped at reduced cap)$5,500
Confirmed vs. Pending Guidance
IRC §163(h)(4) is enacted law, and final regulations (T.D. 10054, Internal Revenue Bulletin 2026-39) apply to tax years 2025 through 2028. Eligibility, phase-out, mixed-use and refinancing rules are confirmed.
Confirmed by Statute, Final Regulations (T.D. 10054) and Notice 2025-57
Deduction cap$10,000 per return per year. All filing statuses. Confirmed
Deduction typeBelow-the-line (Schedule 1-A). Reduces taxable income, not AGI or MAGI. Does not require itemizing. Confirmed
Qualifying vehicleNew only, U.S.-assembled (VIN 1/4/5), passenger vehicle, GVWR < 14,000 lbs, purchased after Dec 31, 2024. Confirmed
Phase-out threshold$100,000 MAGI single/HOH · $200,000 MAGI MFJ Confirmed
Phase-out rate$200 reduction per $1,000, or part of $1,000, of MAGI over threshold Confirmed
Fully phased out (full $10,000 cap)MAGI over $149,000 single/HOH/MFS · over $249,000 MFJ Confirmed
LeasesDo not qualify. Loan must purchase the vehicle. Confirmed
Refinancing qualifying vehicleAllowed up to the balance of the loan refinanced; new loan must also be secured by a first lien. Confirmed
MFS filersEligible, $100,000 threshold. Confirmed
SunsetTY 2025–2028. Expires December 31, 2028. Confirmed
Final regulations (T.D. 10054): mixed-use interest need not be allocated but cannot be deducted twice, and the vehicle must be expected to be used for personal purposes more than 50% of the time. A refinanced loan qualifies up to the balance it replaces; refinancing a pre-2025 vehicle never qualifies. Lenders that receive $600 or more of interest report it (Form 1098-VLI); for 2025, a lender statement under Notice 2025-57 is enough. Confirmed
Who Benefits Most
Likely Gets Meaningful Benefit
Single filers earning under $100,000 who financed a new U.S.-assembled vehicle in 2025 or laterFull $10,000 cap available. No phase-out reduction.
Buyers with large loan balances on qualifying vehiclesMore interest paid in early amortization years = more to deduct, up to the cap.
Workers in the 22%–24% marginal bracketsMost meaningful income tax savings per dollar of deduction.
Gets Little or No Benefit
Buyers of foreign-assembled vehiclesExcluded regardless of make or brand. Assembly location governs, check VIN first character (must be 1, 4, or 5).
LesseesLeases are excluded. Loan must purchase the vehicle.
Single filers with MAGI above $149,000Fully phased out at the $10,000 cap. MFJ filers phase out above $249,000.
Buyers of used or certified pre-owned vehiclesNew-only requirement. No exception for low-mileage used vehicles.
Buyers of commercial vehicles (GVWR ≥ 14,000 lbs)Heavy-duty vehicles excluded by statute.
Key Advantage: Available Without Itemizing
Unlike the mortgage interest deduction, this deduction is claimed on Schedule 1-A, so standard-deduction filers get it too. It is a below-the-line deduction: the Schedule 1-A total flows to Form 1040 line 13b, after the AGI line (line 11), so it reduces taxable income but not AGI or MAGI. You do not need to itemize.
Standard Deduction vs. Auto Loan Deduction, Why Both Apply
Single, $60,000 income, $8,000 auto interest, takes standard deductionAGI stays $60,000. The standard deduction ($15,750) and the $8,000 §163(h)(4) deduction both come off after AGI: taxable income $36,250. Both deductions stack.
Single, $60,000 income, $8,000 auto interest, itemizesAGI stays $60,000. Itemized deductions and the $8,000 §163(h)(4) deduction both come off after AGI and reduce taxable income. Because AGI is unchanged, there is no extra benefit for AGI-floored itemized items.
Single, $155,000 MAGIFully phased out above $149,000. No §163(h)(4) deduction available.
Real-World Scenarios
Single Filer, TY 2025, New U.S.-Assembled Sedan, $38,000 Purchase Price
Vehicle purchase price$38,000
Loan amount (after down payment)$32,000
Loan term and rate60 months, 6.9% APR
Year 1 interest paid (approx.)$2,060
Cap check ($10,000)Under cap
MAGI ($72,000 vs $100,000 threshold)No phase-out
Deductible amount (TY 2025)$2,060
Federal marginal rate (22% bracket)22%
Federal income tax savings$453.20
This filer saves approximately $453 in federal income tax for TY 2025. As the loan ages, annual interest paid decreases with each year of amortization, reducing the deductible amount in later tax years. The deduction remains available each year through TY 2028 as long as the filer continues to qualify. The filer claims the deduction on Schedule 1-A and does not need to itemize.
Scenario 2: MFJ, $150,000 Household Income, $35,000 Loan at 7%, 60 Months (Derived)
Year 1 interest paid (approx.)$2,200
Cap check ($10,000)Under cap
MAGI phase-out check ($150,000 vs $200,000 MFJ)No phase-out
Deductible amount$2,200
Federal marginal rate (22% bracket)22%
Federal income tax savings$484 Derived
Scenario 3: Single, $75,000 Income, $55,000 Loan at 6.5%, 72 Months, 4-Year Estimate (Derived)
Year 1 interest paid (approx.)$3,400
Year 2 interest paid (approx.)$3,100
MAGI phase-out check ($75,000 vs $100,000)No phase-out, full deduction each year
Marginal rate: 22%Saves ~$748/year on average
Estimated 4-year benefit (TY 2025–2028)~$2,800 total Derived
NoteInterest declines each year with amortization. Actual annual amounts will differ from estimates.
Practitioner Insight
LMN Tax Inc., Client Pattern
The most common error we see involves used vehicles purchased from private sellers. A client who paid $32,000 for a three-year-old vehicle assembled in the United States cannot claim the deduction. The vehicle must be new. A second common error involves assembly location: several foreign-brand vehicles are assembled in the United States and qualify, while some domestic-brand vehicles are assembled outside the U.S. and do not. The VIN decoding tool at the NHTSA website confirms assembly country. Do not assume based on brand alone.
Refinancing is the third pattern we flag consistently. Clients who refinanced their 2023 or 2024 vehicle loan in 2025 sometimes expect to qualify under IRC § 163(h)(4). The purchase date remains the original date. Refinancing does not create a new qualifying purchase date. If the vehicle was bought before January 1, 2025, the interest on any refinanced loan does not qualify regardless of when the refinance occurred.
Married couples deciding whether to file jointly or separately should know that this deduction, unlike the tips, overtime and senior deductions, does not require a joint return. On a separate return the phase-out starts at $100,000 of MAGI instead of $200,000, and the $10,000 cap applies to that return. Only the spouse who owes the qualifying loan and paid the interest should claim it. We flag this at the planning stage when clients are choosing a filing status for other reasons.
When This Deduction Does Not Apply
- Used vehicles: the vehicle must be new at the time of purchase. There is no exception for low-mileage or lightly used vehicles.
- Vehicles not assembled in the United States: assembly location controls, not the brand or country of the manufacturer's headquarters.
- Vehicles purchased before January 1, 2025: the purchase must have occurred after December 31, 2024. Loans originated in 2024 or earlier do not qualify, even if payments continue through 2025 and beyond.
- Vehicle leases: a lease is not a loan. Lease payments do not include deductible interest under IRC § 163(h)(4).
- Commercial and heavy-duty vehicles: the vehicle must have a GVWR of less than 14,000 lbs. Vehicles at or above that threshold do not qualify under this personal deduction.
- Refinancing a pre-2025 vehicle: refinancing a loan on a vehicle originally purchased before January 1, 2025 does not create a new qualifying purchase date. Interest on such a refinanced loan does not qualify. Refinancing a loan on a qualifying post-2024 vehicle is allowed, but under the final regulations the new loan qualifies only up to the balance of the loan it refinances. You cannot increase the deductible base by refinancing to a higher loan amount.
- MAGI above the phase-out elimination point: with the full $10,000 cap, single, HOH and MFS filers with MAGI over $149,000 receive no deduction; MFJ filers phase out above $249,000.
- After December 31, 2028: the deduction sunset is fixed. Interest paid in 2029 and beyond receives no federal deduction unless Congress acts.
State Tax Conformity
IRC § 163(h)(4) is a federal income tax deduction. Most states have not enacted a matching provision. If your state does not conform to the OBBBA auto loan interest deduction, auto loan interest remains fully taxable at the state level regardless of what you claim on your federal Schedule 1-A.
State conformity is a legislative question. As of March 2026, no IRS or Treasury guidance addresses state-level treatment. Check your state tax authority's website or consult a tax professional familiar with your state's tax code before assuming any state savings from this deduction.
This calculator produces a federal income tax estimate only. State tax savings, if any, are not included in the result.
Frequently Asked Questions
What is the $10,000 cap on the auto loan interest deduction?
Under IRC § 163(h)(4), the maximum deduction is $10,000 per return per year. This cap applies regardless of filing status. If you paid less than $10,000 in qualifying auto loan interest, you deduct only what you actually paid. The cap is per return, not per vehicle or per loan.
Which vehicles qualify for the auto loan interest deduction?
The vehicle must be new (not used), assembled in the United States, a passenger vehicle (not commercial or heavy-duty), and purchased after December 31, 2024. All four requirements must be met, and the loan must be secured by a first lien on the vehicle. A used vehicle assembled in the U.S. does not qualify. A new vehicle assembled outside the U.S. does not qualify. Check the VIN using the NHTSA database if you are uncertain about assembly location.
Can I deduct auto loan interest if I take the standard deduction?
Yes. IRC § 163(h)(4) is a below-the-line deduction reported on Schedule 1-A (Form 1040 line 13b), after the AGI line (line 11). It reduces taxable income, not AGI or MAGI. It is available whether you itemize or take the standard deduction, so you do not need to itemize to claim it. You claim it on Schedule 1-A (Form 1040).
What are the income phase-out limits for the auto loan interest deduction?
The deduction phases out when MAGI exceeds $100,000 for single, head of household and married-filing-separately filers, and $200,000 for married filing jointly. The deduction is reduced by $200 for every $1,000 (or part of $1,000) of MAGI above the threshold. With the full $10,000 cap, the deduction reaches zero once MAGI is more than $149,000 for single, head of household and married-filing-separately filers, and more than $249,000 for married filing jointly.
Does the deduction apply to used vehicles?
No. IRC § 163(h)(4) applies only to new vehicles purchased after December 31, 2024. A used, pre-owned, or certified pre-owned vehicle does not qualify, regardless of how recently it was manufactured or whether it was assembled in the United States.
Does the deduction apply if I refinanced my auto loan?
Refinancing a loan on a vehicle purchased before January 1, 2025 does not create a new qualifying purchase date. The original purchase date determines eligibility. If the vehicle was purchased before 2025, interest on a refinanced loan does not qualify under IRC § 163(h)(4).
What if I am married but file separately?
Married filing separately filers can claim the IRC § 163(h)(4) deduction if they otherwise qualify. Unlike the tips, overtime and senior deductions, the car loan interest deduction has no joint-return requirement. A separate return uses the $100,000 phase-out threshold and the same $10,000 cap per return.
Can I claim both the auto loan interest deduction and the no tax on tips or overtime deductions?
Yes. The IRC § 163(h)(4) auto loan interest deduction, the IRC § 224 no tax on tips deduction, and the IRC § 225 no tax on overtime deduction are separate below-the-line deductions reported on Schedule 1-A; they reduce taxable income, not AGI or MAGI. All three can be claimed on the same Schedule 1-A if the taxpayer qualifies independently for each. Each deduction has its own cap and phase-out. Claiming one does not reduce or disqualify another.
Does the deduction apply to vehicle leases?
No. IRC § 163(h)(4) applies to interest on a loan used to purchase a qualifying new vehicle. A lease is not a loan. Lease payments do not include deductible interest under this provision, and the lessee does not own the vehicle.
When does the auto loan interest deduction expire?
The deduction applies to tax years 2025 through 2028. Under IRC § 163(h)(4), no deduction is allowed for any tax year beginning after December 31, 2028. Congress would need to act to extend or make it permanent.
How do I find my qualifying auto loan interest paid for the year?
Your lender is required to provide a Form 1098 or equivalent annual statement showing total interest paid. For auto loans, lenders typically provide this in January for the prior tax year. Use the total interest figure from that statement for the qualifying vehicle loan only. If you have multiple auto loans, use only the interest from the loan used to purchase the qualifying new vehicle.
What To Do Next
If you purchased a new U.S.-assembled passenger vehicle after December 31, 2024 and financed it with a loan, use this calculator to estimate your deduction and verify your marginal rate. Then claim the deduction on Schedule 1-A when filing your return.
If your MAGI is approaching $100,000 (single/HOH) or $200,000 (MFJ), run the phase-out calculation before filing. The deduction reduces $200 for each $1,000, or part of $1,000, above the threshold. At $125,000 MAGI single, the deductible cap falls to $5,000. Above $149,000 MAGI single, the deduction is fully eliminated.
If you also received tip income or overtime pay in TY 2025 or 2026, you can claim all three OBBBA deductions on the same Schedule 1-A. Use the No Tax on Tips Calculator and the No Tax on Overtime Calculator to estimate combined savings. Each deduction has its own cap and phase-out and they do not reduce each other.
After calculating your deduction, use the Refund Date Estimator to estimate how a lower federal tax bill may affect your expected refund timing.
The auto loan deduction is one of six OBBBA provisions for TY 2025–2028. If you also have tip income, overtime pay, or children, other OBBBA provisions may apply on the same return. See the OBBBA Tax Changes Guide for a complete overview and stacking rules.
Related OBBBA Tools and Guides
Correction · October 2026. An earlier version of this calculator said married-filing-separately filers cannot claim this deduction and did not offer that filing status. That was incorrect: IRC §163(h)(4) has no joint-return requirement, so an otherwise eligible separate filer qualifies, with the $100,000 phase-out threshold. The calculator also rounded the phase-out down to whole $1,000 steps; the law reduces the deduction by $200 for each $1,000 or part of $1,000 of MAGI above the threshold, so results changed by up to $200 for MAGI just above a $1,000 step. This page also left out the requirement that the loan be secured by a first lien on the vehicle (IRC §163(h)(4)(B)); it is now in the key takeaways, rules table, and FAQ. The calculator now asks whether the loan is secured by a first lien and shows a zero deduction if it is not. The mixed-use section also said Notice 2025-57 requires splitting interest by business-use percentage; under the final regulations (T.D. 10054) a split is optional, and a vehicle expected to be used more than half in a trade or business (other than as an employee) does not qualify. See our Corrections Policy and Log.
Sources
- IRC § 163(h)(4), Qualified Motor Vehicle Loan Interest Deduction (U.S. House, Office of the Law Revision Counsel)
- IRS.gov, IRS Published Schedule Taxpayers Will Use to Claim Deductions on No Tax on Tips, No Tax on Overtime, No Tax on Car Loans, No Tax on Seniors
- IRS.gov, One Big Beautiful Bill Act Provisions
- Internal Revenue Bulletin 2026-39, T.D. 10054 - final regulations on the car loan interest deduction, including the definition of a first lien (§1.163-16(b)(15)).
- IRS Schedule 1-A (Form 1040), Additional Deductions
- NHTSA, Vehicle Identification Numbers (VIN), Assembly Plant and Country of Origin