Yes, car loan interest is tax deductible on your federal return for the first time in decades, but with sharp limits on which loans qualify. The One Big Beautiful Bill Act, signed in 2025, created a new deduction of up to $10,000 a year in interest on a loan for a new vehicle assembled in the United States and used primarily for personal driving.1Federal Register. Car Loan Interest Deduction – Proposed Rule The deduction runs for tax years 2025 through 2028 and is available whether you itemize or take the standard deduction.2Internal Revenue Service. Treasury, IRS Provide Guidance on the New Deduction for Car Loan Interest Under the One Big Beautiful Bill Self-employed drivers can separately deduct the business share of their car loan interest on Schedule C, as they always could. W-2 employees who drive personal cars for work cannot deduct a business share at all.
Before this change, federal law barred any deduction for personal interest, including car loan interest for commuting, errands, or family travel.3Office of the Law Revision Counsel. 26 USC 163 – Interest The new category, called qualified personal vehicle loan interest (QPVLI), sits above the line, so it reduces your adjusted gross income directly.
Which Car Loans Qualify
The vehicle has to meet every one of the following conditions to count as an “applicable passenger vehicle”:1Federal Register. Car Loan Interest Deduction – Proposed Rule
- New, with original use beginning with you. Used vehicles are out.
- Final assembly in the United States. Foreign-assembled cars don’t qualify even if the manufacturer is American.
- Expected to be used more than 50% of the time for personal purposes by you, your spouse, or a dependent, judged at the time you take out the loan.
- Secured by a first lien on the vehicle. An unsecured personal loan used to buy a car does not qualify.
- Gross vehicle weight rating under 14,000 pounds. That covers almost all cars, SUVs, and pickups.
- Loan taken out after December 31, 2024. Refinancing an older loan does not create a new qualifying debt.
The personal-use test is a one-time check at the time you take out the loan. If your driving later shifts and business use climbs above 50%, you don’t lose the deduction retroactively; the IRS looks at what you reasonably expected when you signed the paperwork.1Federal Register. Car Loan Interest Deduction – Proposed Rule
The $10,000 Cap and Income Phaseout
The annual cap is $10,000 per return regardless of filing status. Married couples filing jointly share one $10,000 limit; couples filing separately each get up to $10,000 on their own return.1Federal Register. Car Loan Interest Deduction – Proposed Rule
The deduction phases out at higher incomes. It’s reduced by $200 for every $1,000 (or part of $1,000) by which your modified adjusted gross income exceeds $100,000 single or $200,000 joint. The deduction disappears entirely at $150,000 single and $250,000 joint.
A single filer with MAGI of $125,000 sits $25,000 over the threshold. That’s 25 increments of $1,000, each cutting the cap by $200, for a $5,000 total reduction. Their maximum QPVLI deduction is $5,000.
If You’re Self-Employed
Self-employed taxpayers keep the older, separate ability to deduct the business share of car loan interest on Schedule C (or Schedule F for farming).4Internal Revenue Service. Topic No. 510, Business Use of Car There is no $10,000 cap and no US-assembly requirement for this business deduction. If the car is 70% business and 30% personal, you deduct 70% of the interest. Full business use means full deduction.
The percentage comes from mileage: business miles divided by total miles for the year.5Internal Revenue Service. Instructions for Schedule C (Form 1040) One caveat: if you use the IRS standard mileage rate (72.5 cents per mile for 2026) instead of tracking actual expenses, that rate already builds in most operating costs.6Internal Revenue Service. IRS Sets 2026 Business Standard Mileage Rate at 72.5 Cents Per Mile, Up 2.5 Cents To deduct loan interest as its own line item, you generally need the actual-expense method.
W-2 Employees Cannot Deduct Business Use
If you get a W-2, you cannot deduct car loan interest as a business or work-related expense on your federal return, even if you drive your personal car for the job constantly. The Tax Cuts and Jobs Act suspended unreimbursed employee expenses in 2018, and the One Big Beautiful Bill Act made that permanent.3Office of the Law Revision Counsel. 26 USC 163 – Interest The statute specifically excludes “the trade or business of performing services as an employee” from the business interest rules. A few narrow categories still qualify for job-expense deductions: qualified performing artists, certain military reservists, fee-basis state and local officials, and employees with disability-related work expenses.
A W-2 employee who bought a qualifying new vehicle after 2024 can still claim the personal QPVLI deduction. What’s off the table is any business-use write-off.
Mixed-Use Vehicles
When a car serves both business and personal use, a self-employed taxpayer whose vehicle meets the QPVLI rules has a choice. You can deduct the business share of interest on Schedule C, claim the whole interest amount as QPVLI on Schedule 1-A (within the $10,000 cap and phaseout), or split between the two.1Federal Register. Car Loan Interest Deduction – Proposed Rule
Say you paid $3,500 in car loan interest, and your driving was 45% business and 55% personal. You could deduct $1,575 on Schedule C. Or, if your income is below the phaseout and the car qualifies, you could claim the full $3,500 as QPVLI. Or you could put $1,575 on Schedule C and $1,925 on Schedule 1-A. Which saves more depends on your income and self-employment tax exposure: Schedule C deductions also cut your self-employment tax base, while QPVLI only reduces income tax.
One boundary matters here. QPVLI requires that at the time you bought the car you expected more than 50% personal use. A vehicle bought primarily for business (say, 70% business use expected at purchase) does not qualify for QPVLI at all, and you’re limited to the business share on Schedule C.
How to Claim It on Your Return
The personal deduction goes on Schedule 1-A (Form 1040), a new form created for deductions under the One Big Beautiful Bill Act. You’ll need to report the vehicle’s VIN.1Federal Register. Car Loan Interest Deduction – Proposed Rule The IRS has indicated it will cross-reference VINs to verify US final assembly.
Business-use interest goes on Schedule C (or Schedule F), on the line for business interest expense rather than mortgage interest.7Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss From Business (Sole Proprietorship)
Your lender supplies the interest figures. Starting with the 2026 tax year, lenders must issue Form 1098-VLI to any borrower who paid $600 or more in qualifying interest during the year, applied per loan rather than in aggregate.8Internal Revenue Service. Instructions for Form 1098-VLI (Rev. December 2026) If you paid less than $600, you can still deduct the interest; pull the total from monthly statements or your lender’s portal. For the 2025 tax year (filed in early 2026), no 1098-VLI exists yet, so you’ll rely on your lender’s annual statement or a calculation from monthly statements.
Keep the loan agreement, the interest statement or 1098-VLI, and, if you’re claiming business use, a contemporaneous mileage log with the date, destination, purpose, and miles for each business trip.9Internal Revenue Service. What Kind of Records Should I Keep Hold onto these records for at least three years after you file.