A new federal tax deduction lets some car buyers write off loan interest for the first time in decades. The break, created by the One, Big, Beautiful Bill Act, applies to vehicles purchased with financing after 2024 and assembled in the United States. For a taxpayer who buys a new car in 2026, the deduction can be claimed on the return filed for that tax year, cutting the cost of financing by hundreds or thousands of dollars depending on the loan balance and interest rate charged.
The $10,000 Deduction Under the One, Big, Beautiful Bill Act
Congress created the deduction, formally known as the deduction for qualified passenger vehicle loan interest, through Section 70203 of Public Law 119-21, the One, Big, Beautiful Bill Act signed into law on July 4, 2025. The provision amends Internal Revenue Code section 163(h) to allow the deduction for taxable years beginning after December 31, 2024, and before January 1, 2029, with a maximum of $10,000 in interest per return regardless of filing status. A buyer who finances a qualifying vehicle in 2026 can deduct the interest paid that year on the return covering tax year 2026.
The deduction is available whether a taxpayer itemizes or claims the standard deduction, since the law also amended section 63(b) so non-itemizers can claim it. According to the Internal Revenue Service, qualifying interest can also cover amounts customarily financed alongside a vehicle purchase, such as sales tax, vehicle-related fees, service plans and extended warranties, provided they are directly tied to the purchased vehicle. Lease payments do not qualify, and neither does interest on a loan for a used car, even one that otherwise meets every other requirement.
Free retirement updates: Keep more of your Social Security and savings with plain-English updates on the changes, deadlines, and costly mistakes retirees miss. Subscribe free.
Final Assembly, the VIN and Original Use
Not every new vehicle qualifies, because eligibility is tied to where a car, minivan, van, SUV, pickup truck or motorcycle receives its final assembly rather than where the brand is headquartered. A qualifying vehicle must carry a gross vehicle weight rating under 14,000 pounds, and its original use must commence with the taxpayer, meaning the taxpayer is the first person to take delivery after the vehicle is sold, registered or titled. The Treasury Department and the IRS proposed regulations in late December clarifying how buyers and lenders verify those requirements.
Buyers can confirm final assembly location through the vehicle identification number using the National Highway Traffic Safety Administration’s VIN Decoder, which reports a vehicle’s plant of manufacture, or by reading the vehicle information label posted on a dealer’s lot. That VIN must be included on the tax return for any year the deduction is claimed. A taxpayer who later refinances a qualifying loan can still deduct interest on the refinanced balance, though the deductible amount is limited to the loan’s outstanding balance as of the refinancing date.
The law also sets a personal-use standard for anyone splitting a vehicle between household driving and other purposes. Under the proposed regulations, a taxpayer is treated as purchasing a vehicle for personal use if, at the time the loan is taken out, the taxpayer expects the vehicle to be driven by the taxpayer, a spouse or a close relative for more than half of the time the taxpayer expects to own it. A retiree who finances a truck used mostly for personal errands but occasionally for a small side business would likely still clear that threshold, while a vehicle bought primarily for a delivery route would not.
How the Income Phase-Out Actually Works
The $10,000 ceiling shrinks well before many buyers reach it. Under the statute, as detailed in the Treasury Department’s proposed rule, the deduction is reduced by $200 for every $1,000, or part of $1,000, by which a taxpayer’s modified adjusted gross income exceeds $100,000 for single filers or $200,000 for joint filers. A single filer with $125,000 in modified adjusted gross income loses $5,000 of the deduction under that formula, and the benefit disappears entirely once modified adjusted gross income reaches $150,000 for single filers or $250,000 for joint filers on a joint return.
The car loan deduction shares its 2025-through-2028 window with a related OBBBA provision aimed at older taxpayers: an additional $6,000 deduction for individuals age 65 and older, which phases out above $75,000 in modified adjusted gross income for single filers and $150,000 for joint filers. A retiree drawing Social Security alongside pension or investment income needs to total every income source before assuming the full $10,000 car loan figure applies on top of that senior deduction.
Lender Reporting and the Comment Period Ahead
Lenders have their own new obligation under section 6050AA of the tax code, which requires any business that receives more than $600 in a calendar year on a qualifying vehicle loan to file an information return with the IRS and send a statement to the borrower. The proposed regulations would require that statement to carry a notice warning the borrower that the full interest amount reported may not be fully deductible once the income phase-out applies, and the IRS has already granted lenders transition relief for tax year 2025 to build the reporting systems the requirement demands.
Treasury and the IRS opened the proposed regulations to public comment through February 2, 2026, with a public hearing scheduled for February 24 to hear from lenders and tax preparers on the reporting mechanics before the rules are finalized. For a buyer financing a new vehicle now, the practical step is keeping both the vehicle information label and the loan contract, since either document can substantiate final assembly location and the interest amount if the IRS later asks for proof behind the deduction.
This article was produced with AI assistance and reviewed by The Financial Wire editorial team.
More Financial Reading
- How many CDs can you park at 1 bank? FDIC rules you must know
- Bank statements: how long to keep them and when to toss them
Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
