Car loan interest deduction: the $10,000 cap and who qualifies

The 2025 budget law, Public Law 119-21, created a deduction for the interest on a loan used to buy a new car. It sits in the tax code as section 163(h)(4), it runs for four tax years, 2025 through 2028, and it comes with a dollar cap, an income limit and conditions on both the car and the loan. On September 8, 2026 the Treasury Department and the IRS published final regulations that settle how those conditions work. They take effect on November 9, 2026 and apply to every tax year the deduction covers, including 2025.

It is a deduction, not a credit, and you do not have to itemize to take it. The statute makes it available alongside the standard deduction, and the final regulations say so directly.

The $10,000 cap

The most interest you can count in a year is $10,000. The final regulations set that limit per return regardless of filing status, so a married couple filing jointly shares one $10,000 cap rather than getting one each.

The cap is a ceiling on what counts, not an amount you receive. Someone who paid $1,800 of qualifying interest in the year deducts $1,800.

The income limit

Above a set income the cap shrinks. The statute reduces it by $200 for each $1,000, or part of $1,000, by which modified adjusted gross income is over $100,000, or over $200,000 on a joint return. Modified adjusted gross income here is adjusted gross income plus anything excluded under sections 911, 931 and 933, the provisions for foreign earned income and income from certain US territories. The final regulations confirm that a head of household uses the $100,000 threshold; the statute sets only two figures.

A worked example: a single filer with modified AGI of $112,500 is $12,500 over the line. That counts as 13 thousands or parts of a thousand, so the cap falls by $2,600, from $10,000 to $7,400. The cap reaches zero at $150,000 for a single filer and at $250,000 on a joint return.

The car has to qualify

Only a new vehicle counts: the statute requires that the original use of the vehicle begin with the taxpayer, which rules out used cars. It has to be a car, minivan, van, sport utility vehicle, pickup truck or motorcycle, made primarily for use on public roads, with a gross vehicle weight rating under 14,000 pounds.

Its final assembly has to have taken place in the United States. That is the condition most likely to catch a buyer out, because a brand says nothing about where a particular car was put together. The final regulations let you rely on either the plant of manufacture shown in the vehicle identification number or the final assembly point on the label attached to the car, and the Treasury Department and the IRS point to NHTSA's VIN decoder as one way to read the VIN.

The loan has to be for a vehicle bought for personal use. The final regulations treat that test as met if, when you take out the loan, you expect to use the vehicle for personal purposes more than 50 percent of the time. It is checked once, at that point, and is not an ongoing requirement.

The loan has to qualify

The debt has to have been taken on after December 31, 2024, to buy the vehicle, and it has to be secured by a first lien on it. The statute excludes lease financing, loans to finance fleet sales, loans for a commercial vehicle not used for personal purposes, loans for a vehicle with a salvage title or one bought for scrap or parts, and debt owed to a related person.

Refinancing keeps the deduction alive, within a limit. A new loan that replaces a qualifying one counts if it is secured by a first lien on the same vehicle, but only up to the amount of the debt it refinanced.

What counts as interest

The final regulations say qualifying interest includes prepaid interest in the form of points and deferred or capitalized interest, and origination or financing charges treated as interest. Where a loan pays for more than the vehicle, interest has to be allocated between the qualifying and non-qualifying parts. Debt taken on to repay negative equity from a trade-in is not part of the qualifying loan, and neither is borrowing for collision and liability insurance. The final regulations do allow several items commonly financed with a car purchase to sit inside the qualifying loan, among them extended warranties, guaranteed asset protection (GAP) insurance, key fob replacement and title and registration fees.

Claiming it

For tax year 2025 the deduction is claimed on Schedule 1-A, Part IV, "No Tax on Car Loan Interest", the same schedule that carries the new deductions for tips, overtime and seniors. The schedule caps the interest at $10,000 on line 24, applies the income limit on the lines after it, and sends the total to line 13b of Form 1040.

The vehicle identification number has to be on the return. The statute allows no deduction without it, and the Form 1040 instructions say that if you paid qualifying interest on more than one vehicle, you include the VIN of each. Interest already deducted on Schedule C, E or F as a business expense is entered in its own column and is not counted twice.

The lender's statement

A lender that receives $600 or more of interest in a year on a qualifying loan has to report it to the IRS, and the Form 1098-VLI, Vehicle Loan Interest Statement, carries the figures, including the VIN. The borrower's statement is due by January 31 of the following year. For 2025, the first year, Notice 2025-57 let lenders meet the requirement by making the year's interest figure available by January 31, 2026, for example through an online account or a regular statement. The final regulations keep that relief for 2025 and add no further transition period.

What the final rules settled

The Treasury Department and the IRS received 63 public comments on the proposed version. The final regulations keep the core of it and clarify what counts as interest and which financed extras can be included. They leave the income thresholds where the statute put them.

The deduction sits alongside the other new ones from the same law, which no tax on tips and overtime explains. The brackets it reduces are on the tax figures tracker, and the season's refund dates are on IRS refund schedule 2027.

None of this is tax advice for your situation. It describes what the statute, the final regulations and the IRS forms say, so you can check a car and a loan against them before you file.