Starting with tax year 2025, interest paid on a qualifying auto loan is tax-deductible, up to $10,000 per year. This is one of the four new Schedule 1-A deductions under the OBBBA, and the eligibility rules are more specific than most people expect.
Eligibility Checklist
Every one of these must be true:
- New vehicle: original use begins with you (no used, no CPO)
- Assembled in the United States: verified by VIN, not brand
- Loan originated after December 31, 2024
- First lien secured by the vehicle
- Personal use only (not business)
- Under 14,000 lbs gross vehicle weight
- Qualified lender (not family or friends)
- VIN reported on Schedule 1-A
- Must file jointly if married
Assembly Location, Not Brand, Determines Eligibility
This is the #1 mistake. A Toyota built in Kentucky qualifies. A Ford built in Mexico does not. Always verify before claiming.
How to verify: Use the NHTSA VIN Decoder, check the Monroney window sticker, or look at the first digit of the VIN. If it starts with 1, 4, or 5, it was assembled in the U.S.
Income Phaseout
This deduction phases out twice as fast as the tips and overtime deductions:
- Single/HoH: $100,000 – $150,000 MAGI
- MFJ: $200,000 – $250,000 MAGI
- Rate: $200 per $1,000 over the threshold
- MFS: Completely ineligible
Example: Single filer at $120,000 MAGI → $20,000 over threshold → $4,000 reduction → $6,000 deduction remaining. At 24% bracket, that's $1,440 in tax savings.
What Doesn't Qualify
- Used vehicles: no exceptions, even low-mileage or certified pre-owned
- Leases: only loan interest, not lease payments
- Business vehicles: deductible through Section 179/depreciation instead
- Family loans: must be from a commercial lender
- Vehicles over 14,000 lbs GVWR
Refinanced Loans
Interest on a refinanced loan can qualify if the original loan was originated after 12/31/2024 and the new loan remains a first lien on the same vehicle. But only interest on the outstanding balance at refinancing qualifies. Cash-out amounts do not.
How Lenders Report It
2025 (transition): Under Notice 2025-57, lenders just need to provide a year-end interest statement by January 31, 2026. No Form 1098-VLI required yet.
2026+: New Form 1098-VLI reports interest of $600+ with full vehicle details and VIN.
Deduction vs. Credit
The $10,000 is a deduction, not a credit. At 22% bracket = $2,200 savings. At 24% = $2,400. Most borrowers pay $2,000–$5,000 in interest per year, so realistic savings are $500–$1,500 for most filers.
Planning Tip
If you're near the phaseout threshold, maximizing retirement contributions or timing capital gains can keep your MAGI below $100K (single) or $200K (MFJ) and preserve the full deduction. If buying a new vehicle, verify assembly location before signing. The difference could be worth thousands over the life of the loan.
For help determining whether your vehicle qualifies, contact TS CPA for a consultation.