Car Loan Interest Is Now Tax-Deductible — But Only for Made-in-America Vehicles

The Basics

Starting with loans taken out after December 31, 2024, you can deduct the interest you pay on a car loan — up to $10,000 per year — from your federal taxable income. It's an above-the-line deduction. You don't need to itemize. Just claim it on your 1040.

But this isn't a blanket "car loan interest is deductible" situation. There are five major conditions, and if you miss any one of them, you get nothing:

1. The vehicle must be new. Used cars don't qualify. Period.
2. Final assembly must be in the United States. Not designed in the US. Not headquartered in the US. Assembled in the US.
3. The vehicle must be for personal use. Business vehicles have their own deduction rules (Section 179, depreciation). This deduction is specifically for personal-use vehicles.
4. Gross vehicle weight rating must be under 14,000 pounds. This covers essentially every passenger car, SUV, and pickup truck. You'd have to be buying a medium-duty commercial truck to exceed this.
5. The loan must have been originated after December 31, 2024. Refinanced loans count if the original purchase was after that date.

The "Made in America" Requirement — This Is the Catch

This is where it gets interesting. A lot of "American" cars aren't assembled in the US, and a lot of "foreign" cars are.

The Honda Accord? Built in Marysville, Ohio. Qualifies. The Chevrolet Blazer EV? Assembled in Ramos Arizpe, Mexico. Doesn't qualify. The BMW X5? Spartanburg, South Carolina. Qualifies. The Ford Maverick? Hermosillo, Mexico. Doesn't qualify.

The brand on the badge is irrelevant. What matters is the VIN — specifically, the first digit. VINs starting with 1, 4, or 5 indicate US assembly. But don't rely on that shortcut alone. Use the NHTSA VIN decoder tool to verify before you assume your vehicle qualifies.

Here are some popular 2025–2026 models and their assembly status:

The list of US-assembled vehicles is actually longer than most people expect. A lot of Japanese, Korean, and German automakers have major assembly plants in the US. But always verify with the VIN before claiming the deduction.

The Phase-Out

The deduction starts shrinking at relatively modest income levels — lower than the tips or overtime phase-outs:

That 20% rate is aggressive. A single filer at $125,000 MAGI — which is common for someone buying a $40,000+ new car — has already lost half the deduction. By $150,000, it's gone entirely.

This matters because the people most likely to be buying new cars with big loans are also likely to be above $100,000 in income. The deduction is structured to help the middle of the market — someone buying a $30,000–$40,000 vehicle on a household income under $100,000 — not the person financing a $65,000 SUV.

How Much You Actually Save

Car loan interest rates in 2026 are running roughly 6–8% for new vehicles with good credit. On a $35,000 loan at 7% over 60 months, you'll pay about $4,200 in interest the first year, declining each year as the principal shrinks.

Let's be honest: the savings aren't huge. On a typical car loan, you're saving $300–$900 in year one, declining each year after that as you pay down principal and the interest portion shrinks. Over a 5-year loan, the total tax savings might be $1,500–$3,000.

It's not a reason to buy a car. But if you're already buying one, it's real money — especially when stacked with the other OBBB deductions.

Form 1098-VLI — The New Tax Form

Starting with tax year 2026, your lender is required to send you Form 1098-VLI (Vehicle Loan Interest) if you paid at least $600 in qualified interest during the year. This is brand new — it didn't exist before the OBBB.

The form will show:

• Total qualified interest paid during the year
• The VIN of the qualifying vehicle
• The loan origination date

For the 2025 tax year (the return due tomorrow), lenders weren't yet required to issue this form. You'll need to calculate your interest from your loan statements and submit your VIN yourself when claiming the deduction.

Leases Don't Count

This trips up a lot of people. If you're leasing a vehicle, the monthly payments include a finance charge that functions like interest — but it's not technically loan interest. It's a lease charge. The deduction explicitly requires a loan to purchase the vehicle. Leases are out.

Given that roughly 20% of new vehicle transactions are leases, that's a significant chunk of buyers who can't use this deduction at all.

Can You Stack This With the EV Tax Credit?

Not anymore. This was possible for vehicles acquired on or before September 30, 2025 — but the One Big Beautiful Bill terminated the $7,500 Clean Vehicle Credit (§30D) and the $4,000 used EV credit (§25E) for vehicles acquired after that date. There is no federal EV purchase credit in 2026.

So the car loan interest deduction now stands alone. A Tesla Model Y financed at $50,000 with a 7% rate generates roughly $3,350 in deductible interest in year one — worth about $737 at the 22% bracket. Real, but a long way from the $8,200-ish stack that was available before the credit ended. See every clean-energy credit that died for the full list of expiry dates.

This Expires in 2028

Same sunset as tips, overtime, and the senior deduction. The car loan interest deduction covers tax years 2025 through 2028. After that, it's gone unless Congress renews it. Given the auto industry lobbying power, extension is plausible — but not guaranteed.

Should This Change Your Car-Buying Decision?

Probably not. A $500 annual tax savings shouldn't be the reason you buy a $35,000 vehicle. But it should influence which vehicle you buy. If you're deciding between two comparable models and one is assembled in the US, the tax math now tilts in favor of the US-assembled option.

And if you're deciding between buying and leasing, this deduction adds a small thumb on the scale for buying — since leases don't qualify.

Want to see how your total tax picture looks with the new deductions? Run the numbers on our US tax calculator to see your full 2026 breakdown.

Sources: IRS/Treasury guidance on the car loan interest deduction under the One Big Beautiful Bill, IRS Form 1098-VLI instructions, One Big Beautiful Bill Act (signed July 4, 2025), NHTSA VIN decoder, IRS Rev. Proc. 2025-32 for 2026 bracket data. Assembly locations verified via manufacturer data and NHTSA records. All take-home calculations via FiscalFold using official IRS parameters.