“No tax on car loans” made for a great headline. The actual deduction is narrower, more conditional, and easier to disqualify yourself from than most people realize.
Under new IRC Section 163(h)(4), individuals may deduct up to $10,000 per year in interest paid on a qualifying vehicle loan for tax years 2025 through 2028. The vehicle must be new, purchased for personal use, and meet other eligibility requirements. The deduction is available whether the taxpayer itemizes or takes the standard deduction.
What the Deduction Actually Is
The Requirements Most People Miss
The vehicle has to be genuinely new — a certified pre-owned or previously titled vehicle doesn’t qualify no matter how recently it was purchased. It also has to be assembled in the United States, which is not the same question as which country the brand is headquartered in; several foreign-brand vehicles are U.S.-assembled and qualify, while some domestic-brand models built abroad do not.
The Vehicle Identification Number has to be reported on the return, and starting with 2026 interest, lenders are required to issue Form 1098-VLI documenting the interest paid.
The Phase-Out That Eliminates It Entirely for Many Filers
The deduction phases out based on modified adjusted gross income:
• Begins phasing out at $100,000 MAGI (single) / $200,000 MAGI (married filing jointly)
• Reduced by $200 for every $1,000 (or portion thereof) above the threshold
• Fully phased out at $150,000 (single) / $250,000 (married filing jointly)
Most buyers won’t see anywhere near the full $10,000 benefit. At a typical marginal tax rate, the realistic first-year savings for many filers lands under $750 — a meaningful number, but far smaller than the headline figure suggests. Clients who assume “car loan interest is now deductible” as a blanket rule are likely to be surprised either by the income phase-out or by discovering their vehicle doesn’t meet the assembly requirement.