Is car loan interest tax deductible? Find out what’s eligible under the OBBBA

Buying a new car is a big purchase for most, so it’s no surprise that many take out a loan to help pay for their new rides. If that sounds like you, a new tax break could help you save money when you file your return.

As you may have heard, changes from the One Big Beautiful Bill Act (OBBBA) will allow qualified taxpayers to deduct up to $10,000 of car loan interest on their federal tax return.

Like most tax benefits, there are specific criteria to be eligible to claim the tax deduction for car loan interest. In this article, we’ll break down what this deduction is, who qualifies for it and exactly how to deduct car loan interest on your return.

And at tax time, H&R Block will be here to help you claim your deduction and get your maximum refund.

What is the Car Loan Interest Tax Deduction?

The Car Loan Interest Deduction allows eligible taxpayers to deduct up to $10,000 in interest paid on qualifying vehicle loans. It applies to new vehicles purchased between January 1, 2025, and December 31, 2028, and only if the vehicle meets specific criteria.

The deduction is available whether you claim itemized deductions or the standard deduction.

Which cars and buyers are eligible for the Car Loan Interest Deduction?

This is a new deduction, so it’s helpful to get familiar with the requirements for the vehicles, loans and taxpayers.  Let’s get into it!

Which vehicles are eligible for the Car Loan Interest Deduction?

• Must be new vehicles. Used vehicles, even if “new” to you, are not eligible.
• Must meet a “final assembly” in the United States designation.
• Must include the Vehicle Identification Number (VIN) on your tax return

What loan requirements are there for the Car Loan Interest Deduction?

• Loan must be secured and used to purchase the qualifying vehicle.
• Loan must be taken out during the years the deduction is applicable (2025-2028).
• Interest must be paid during the tax year.

What are the taxpayer income limits and phaseouts for the Car Loan Interest Deduction?

• Deduction begins to phase out at $100,000 for Single filers / $200,000 for those Married Filing Jointly.
• Deduction is fully phased out at $150,000 (single) / $250,000 (Married Filing Jointly)

If your income falls within the phase-out range, you may still qualify for a partial deduction. Essentially, your deduction would be reduced by $200 for every $1,000 that your MAGI is above the phaseout’s lower threshold. Check out the example in the next section to see how this works.

Car loan interest deduction phase-out example

Let’s say Aliah’s MAGI is $110,000—which means she’s within the phaseout range and won’t be eligible for the full deduction. Because her MAGI is $10,000 over the starting threshold, her deduction will be lowered by $200 for every $1,000 over.

That works out to a $2,000 reduction in the deduction, meaning she can claim a maximum deduction of $8,000.

How will the One Big Beautiful Bill Act affect you?

Check out a breakdown of key changes from the One Big Beautiful Bill Act (OBBBA).

Review OBBBA tax reform changes

Can you get the car loan interest tax deduction in 2025?

Yes, you can claim the deduction starting with your 2025 tax return, filed in early 2026. The deduction applies to interest paid during the tax year, so if you purchase a qualifying vehicle in 2025 and begin making payments, you can include that interest when you file.

The deduction is available annually through 2028. That means as long as you continue to pay interest on a qualifying loan and meet the income and vehicle criteria, you’ll be able to claim this benefit on your taxes.

How to deduct car loan interest

To claim tax deductible car loan interest

1. Gather your documentation about the loan.* 
2. You’ll then plug in your loan details, including the VIN for the vehicle, on Schedule 1-A, Part IV.
3. Submit Schedule 1-A along with your Form 1040 to the IRS. .

*For 2025, you should maintain documentation and may need to request a statement from your lender. In the future tax years, lenders that receive payments of qualified passenger vehicle loan interest will provide you a form similar to Form 1098.

Tax deductible car loan interest FAQs

Is car loan interest tax deductible?

Yes, for tax years 2025 through 2028, car loan interest is tax deductible as long as you, the car and your car loan meet all the criteria.

Is the interest on a car loan tax deductible for a used car that’s “new” to me?
In this case, because it is not a new vehicle, it’s not considered deductible car loan interest.

What is the interest rate on a car loan?
Rates vary based on credit score, loan term, and lender. While not tax-related, understanding your rate helps you evaluate total loan cost.

What If you use your car for business?

If you’re self-employed or use your car for business purposes, you may already be familiar with deducting vehicle expenses.

Under existing tax law, you can choose between:

• Standard mileage rate: A simplified method based on miles driven plus you can deduct the portion of the loan interest related to the business use.
• Actual expense method: Includes costs like depreciation which includes loan interest, gas, maintenance, and insurance. To claim the new deduction, you’ll need to account for your business use percentage and the amount applied to the actual expense method deduction. Your OBBBA car loan interest deduction should then be reduced by that amount.

Keep in mind, the new OBBBA deduction is separate from business-use deductions.

Learn more about the mileage rate deduction and comparing the mileage rate deduction vs. actual expenses.

Rely on H&R Block for help claiming the Car Loan Interest Deduction

While tax changes can be stressful, you don’t have to go it alone. Trust the expertise of H&R Block to help make sense of your taxes. Make an appointment to file with a tax pro or with H&R Block Online.