Car Loan Interest Deduction 2025: Full Guide

Starting with tax year 2025, interest paid on a qualifying auto loan is tax-deductible — up to $10,000 per year. This is a brand-new deduction under the One, Big, Beautiful Bill Act (OBBBA), and it's one of the four deductions claimed on the new IRS Schedule 1-A.

But not every car loan qualifies. The rules around vehicle assembly location, loan type, and income limits are specific — and getting them wrong means losing the deduction entirely.

Who Qualifies for the Deduction

To claim the car loan interest deduction on Schedule 1-A, Part IV, every one of these must be true:

• You purchased a new vehicle — original use begins with you
• The vehicle was assembled in the United States
• Your loan was originated after December 31, 2024
• The loan is secured by a first lien on the vehicle
• The vehicle is for personal use (not business)
• The loan is from a qualified lender (not family or friends)
• The vehicle's gross weight rating is under 14,000 pounds
• You report the VIN on Schedule 1-A
• If married, you file jointly

Qualifying vehicle types include cars, SUVs, pickup trucks, minivans, vans, and motorcycles — anything designed for public roads with at least two wheels.

Assembly Location: The Rule That Trips People Up

This is where most mistakes happen. The deduction is based on where the vehicle was assembled, not who made it. A foreign-brand vehicle built in the U.S. qualifies. An American-brand vehicle built overseas does not.

How to Verify Assembly Location

Three ways to confirm before you claim:

1. NHTSA VIN Decoder — Enter your VIN at the NHTSA website. It reports the manufacturing plant and country.
2. Monroney sticker — The window sticker on the dealer lot lists the final assembly plant.
3. VIN first digit — VINs starting with 1, 4, or 5 indicate U.S. assembly. This is a quick screen, but use the NHTSA decoder to be certain.

Income Phaseouts

The car loan interest deduction has the steepest phaseout of all four Schedule 1-A deductions — it disappears twice as fast as the tips and overtime deductions.

Phaseout Example

A single filer with $120,000 MAGI:

At $150,000 MAGI or above (single), the deduction is fully phased out — $0.

What Doesn't Qualify

• Used vehicles — no exceptions, even certified pre-owned or low-mileage
• Leases — only loan interest qualifies, not lease payments
• Business vehicles — if you depreciate it or claim Section 179, you can't also claim this personal deduction on the same vehicle
• Loans from family members — must be from a qualified commercial lender
• Vehicles over 14,000 lbs GVWR — most commercial trucks and heavy-duty vehicles are excluded

Refinanced Loans

Interest on a refinanced loan can qualify, but only if:

• The original loan was originated after December 31, 2024
• The new loan remains a first lien on the same vehicle
• You only deduct interest on the outstanding balance at the time of refinancing — if you took cash out, interest on the excess does not qualify

How Lenders Report the Interest

For 2025 (transition year): Under IRS Notice 2025-57, lenders are not required to file Form 1098-VLI with the IRS. Instead, they must provide you a year-end total interest statement by January 31, 2026 — through an online portal, annual statement, or printed notice.

Starting 2026: Lenders will use the new Form 1098-VLI (Vehicle Loan Interest) to report interest of $600 or more. This form includes loan details, vehicle information, and VIN.

If your lender hasn't provided a clear interest statement for 2025, check your online loan account or monthly statements and total up the interest paid during the year.

Deduction vs. Credit — Know the Difference

A common misconception: the $10,000 figure is a deduction, not a credit. It reduces your taxable income, not your tax bill dollar-for-dollar.

Interaction with the EV Tax Credit

The OBBBA repealed the Clean Vehicle Credit for vehicles acquired after September 30, 2025. For purchases made between January 1 and September 30, 2025, there was a brief window where both the EV credit (up to $7,500) and the car loan interest deduction could apply to the same vehicle. After that date, only the loan interest deduction remains.

How to Claim It

1. Gather your loan documents: purchase agreement, lender interest statement, and VIN
2. Verify U.S. assembly via NHTSA VIN Decoder
3. Complete Schedule 1-A, Part IV (Lines 22–30)
4. The deduction flows to Form 1040, Line 13b

You can claim this deduction whether you take the standard deduction or itemize. It works alongside the other three Schedule 1-A deductions (tips, overtime, senior deduction) if you qualify for multiple.

Planning Considerations

If you're near the income phaseout threshold, the timing of income recognition matters. Deferring a bonus, maximizing retirement contributions, or timing capital gains could keep your MAGI below $100,000 (single) or $200,000 (MFJ) and preserve the full deduction.

If you're buying a new vehicle and choosing between two models, verify assembly location before signing. The difference between a U.S.-assembled model and an imported one could be worth thousands in tax savings over the life of the loan.

For help determining whether your vehicle qualifies or optimizing your return around this deduction, contact TS CPA for a consultation.