The auto loan interest deduction became available in 2025, and the IRS has now released final regulations for it. They include several important tweaks to the proposed regulations issued at the end of 2025. Here’s what you need to know, especially if you hope to claim the deduction on your 2026 federal income tax return.

Who qualifies for the auto loan interest deduction?

Whether you qualify depends on the loan, the vehicle and your income, not on whether you itemize. The deduction, created by the One Big Beautiful Bill Act (OBBBA), is available to both itemizers and those who take the standard deduction.

The OBBBA defines qualified passenger vehicle loan interest as interest paid or accrued during the tax year on debt incurred by a taxpayer after December 31, 2024, for the purchase of a qualifying vehicle for personal use. The debt must be secured by a “first lien,” meaning the lender generally has priority over other creditors’ claims to the vehicle until the loan is paid off.

A qualifying vehicle must be a car, minivan, van, sport utility vehicle, pickup truck or motorcycle with a gross vehicle weight rating of less than 14,000 pounds. The original use of the vehicle must begin with the taxpayer; leased or used vehicles don’t qualify.

The deduction is also limited to vehicles assembled in the United States, as determined by the final assembly location. Not every vehicle sold by an American manufacturer necessarily has its final assembly in this country. Conversely, some “foreign” vehicles may have their final assembly in the United States.

You’ll also need to report the vehicle identification number (VIN) on your return for each year you claim the deduction.

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How much can you deduct? The $10,000 cap and income limits

The deduction is generally limited to $10,000 per year. If the deduction is a primary motivator in purchasing a new vehicle, bear in mind that most taxpayers won’t qualify for the full $10,000.

For example, assume you purchase a new vehicle before year end and finance $50,000 of the price at a 6.5% interest rate for five years. The total interest over that time will be approximately $8,700. But your deduction for each eligible tax year would be limited to qualifying interest paid that year. Also, the deduction is available only through 2028, unless lawmakers extend it. So your annual deduction would be only a fraction of the total $8,700 of interest, and you’d be able to deduct the total amount only if the tax break is extended beyond 2028.

Income phaseout

Your annual deduction could be further reduced based on your income. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds $100,000, or $200,000 for married couples filing jointly. The otherwise allowable deduction is reduced by $200 for every $1,000 — or fraction of $1,000 — of MAGI above those thresholds.

Once MAGI reaches $150,000 or $250,000, respectively, the deduction isn’t available. Depending on how much qualifying interest you pay, your deduction could be fully phased out at a MAGI that’s substantially less than $150,000 (or $250,000 if you’re a joint filer).

Finally, keep in mind that deductions reduce your taxable income, not your taxes dollar-for-dollar. So your tax savings will be only a portion of the amount deducted.

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What the final regulations mean for you

Like the proposed regs, the final regs address a range of issues related to the deduction. If you plan to claim it, here are the provisions most likely to affect you:

Qualifying debt: what can be included in the loan

The proposed regs specified that debt qualified only to the extent incurred for a qualifying vehicle purchase. It also qualified for other items or amounts directly related to the purchase and “customarily financed” in the same transaction, including vehicle service plans, extended warranties, sales taxes and vehicle-related fees.

In response to comments on the proposed regs, the final regs identify additional examples of costs that can be included in a qualifying vehicle loan:

• Guaranteed asset protection (GAP) coverage
• Credit insurance products
• Repair plans
• Vehicle protection products
• Key fob replacement plans
• Certain vehicle accessories

The final regs make clear that whether items are customarily financed in a qualifying vehicle purchase and directly related to the purchase is determined on an industry-wide basis, not by the financing terms of a particular lender. Interest on credit card debt related to a vehicle purchase, however, generally doesn’t qualify because the debt usually isn’t secured by the vehicle.

Negative equity from a trade-in

Negative equity occurs when you trade in a vehicle that still has debt exceeding its value and you roll that excess debt into the financing for a qualifying new vehicle. The proposed regs would have excluded this amount from qualifying debt. Industry commenters cited the administrative burden of tracking the separate loan components when requesting that the entire loan count for purposes of the deduction.

The IRS was unmoved. Interest attributable to the negative-equity portion of the loan doesn’t qualify under the OBBBA. The final regs retain the requirement to allocate interest and principal payments proportionately between qualifying and nonqualifying debt. But any down payment is applied first against negative equity and any other amounts that aren’t incurred for the purchase of the vehicle or directly related to the purchase and customarily financed in such a transaction.

Original use and personal use

The final regs recognize that some states require dealers to title or register demonstrator vehicles. Under the proposed regs, this could have resulted in the original use beginning with the dealer rather than a later purchaser. The final regs therefore provide that the original use of a vehicle held by a dealer won’t begin with the dealer if the vehicle is held primarily for sale to customers. But original use begins with a purchaser only if the loan documentation treats the vehicle as a new vehicle.

The final regs retain the rule that the personal use requirement applies only when you incur the debt. At that time, you must expect that you, your spouse or certain relatives will use the vehicle for personal purposes more than 50% of the time over your anticipated ownership period. If actual use later differs from what you expected when you incurred the debt, it won’t change the personal use determination.

 

 

Frequently asked questions about the auto loan interest deduction

Do I have to itemize to claim the auto loan interest deduction?

No. It’s available whether you take the standard deduction or itemize.

Can I deduct interest on a used or leased vehicle?

No. The original use of the vehicle must begin with you, so used and leased vehicles don’t qualify.

What is the maximum auto loan interest deduction?

Generally $10,000 per year. It phases out when MAGI exceeds $100,000 ($200,000 for joint filers) and is eliminated at $150,000 ($250,000 for joint filers).

How long is the deduction available?

Through 2028, unless lawmakers extend it.

Does interest on rolled-in negative equity qualify?

No. Under the final regulations, interest on the negative-equity portion of the loan doesn’t qualify, and payments must be allocated between qualifying and nonqualifying debt.

 

 

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