Is Car Loan Interest Tax Deductible? New Law and Exceptions

Is car loan interest tax deductible? For most drivers, no. Federal law has treated interest on a personal auto loan as non-deductible personal interest since 1991. Two exceptions matter. A new temporary deduction lets some buyers write off up to $10,000 in interest on a loan for a new, U.S.-assembled vehicle for tax years 2025 through 2028. And if you’re self-employed, you can deduct the business-use share of your car loan interest as a business expense, as you always could.

The Default Rule for Personal Car Loans

The tax code disallows a deduction for personal interest, and interest on a loan used to buy a car for commuting, errands, and family driving falls into that bucket by default. The carve-outs from the personal interest rule are narrow: business interest, investment interest, student loan interest, and qualified mortgage interest.¹ An ordinary auto loan hits none of them.

This applies whether you itemize or take the standard deduction. There’s no line on Schedule A for personal car loan interest. The IRS has stated directly that §163(h)(1) “disallows a deduction for personal interest” for individuals.²

The 2025–2028 Deduction for U.S.-Assembled Vehicles

The One, Big, Beautiful Bill Act created a temporary category called qualified passenger vehicle loan interest, effective for tax years beginning after December 31, 2024 and running through 2028.³ The cap is $10,000 of interest per return per year, and you can claim it without itemizing.

Which Vehicles Qualify

All of the following must be true:

The vehicle is new, with its original use beginning with you. Used cars, certified pre-owned, and private-party purchases of previously owned vehicles are out.
Final assembly occurred in the United States. The IRS looks to the vehicle information label to determine this.⁴
The vehicle is a car, minivan, van, SUV, pickup truck, or motorcycle manufactured primarily for public roads, with a gross vehicle weight rating under 14,000 pounds. ATVs, trailers, and campers don’t qualify.⁴
The purchase is for personal use, not inventory, resale, or fleet.

The assembly requirement is easy to get wrong. Some cars sold under domestic brands are built in Mexico or Canada, and some foreign-brand models are built at U.S. plants. Check the window sticker; that’s the label the IRS uses.

Income Phaseouts

The $10,000 cap begins to phase out once modified adjusted gross income exceeds $100,000 for single filers or $200,000 for joint filers. The deduction drops by $200 for every $1,000 of income above the threshold, disappearing at $150,000 (single) and $250,000 (joint).⁵

The cap is per return, not per vehicle. A married couple financing two qualifying cars jointly still shares one $10,000 ceiling. Filing separately, each spouse gets their own $10,000 on their own return.

How to Claim It

Report the deduction on Schedule 1-A (Form 1040). You don’t need to itemize. You will need the Vehicle Identification Number on the return.³ Lenders must report qualifying interest to you and the IRS when at least $600 in interest was paid during the year.

Business Use: The Deduction That Predates the New Law

Self-employed taxpayers, independent contractors, and sole proprietors can deduct the business-use portion of car loan interest as an ordinary business expense on Schedule C (Form 1040). This has existed for decades and stands apart from the temporary provision above.⁶

The deductible share tracks how much you actually drive for business. Divide business miles by total miles. Pay $2,400 in interest, drive 70% for business, and $1,680 is deductible.

This calculation lives or dies on your mileage log. Record the date, destination, business purpose, and miles for each trip, and do it contemporaneously. Reconstructed logs draw scrutiny. A vague entry like “various business errands” won’t hold up. Client names or job site addresses will.

One useful detail: you can still deduct interest even if you use the standard mileage rate (72.5 cents per mile in 2026) rather than actual expenses. The mileage rate covers fuel, depreciation, insurance, and maintenance, but not loan interest. Interest sits on top as a separate line item.⁷

If Both Deductions Are Available

A self-employed driver whose car meets the U.S.-assembly rules can pick which deduction to use, but not both for the same interest. IRS Publication 463 states that the deduction may be reported on either Schedule 1-A or Schedule C, but not both for the same dollars.⁷ Schedule C usually wins the math, because it reduces self-employment tax as well as income tax. Schedule 1-A only reduces income tax.

W-2 Employees Who Drive for Work

If you’re a W-2 employee using your own car for the job, you can’t deduct the business-use portion of your car loan interest. Miscellaneous itemized deductions, which is where unreimbursed employee expenses used to go, are suspended.⁸ The suspension was originally scheduled to expire after 2025 but has been made permanent. The remaining route is employer reimbursement.

Buying a Car With a HELOC or Home Equity Loan

A common question: if I use a home equity loan or HELOC to buy the car, is that interest deductible as mortgage interest? No. Home-secured debt is only deductible if it’s acquisition indebtedness, meaning debt used to buy, build, or substantially improve the home that secures the loan.¹

What controls is how you spend the money, not what secures the loan. HELOC funds spent on a car become non-deductible personal interest. Your house being collateral changes nothing. The broader deduction for home equity interest used for non-improvement purposes was suspended for tax years after 2017 and has not been restored.¹

1
Office of the Law Revision Counsel. 26 USC 163 – Interest
2
Internal Revenue Service. Revenue Ruling 2010-25
3
Internal Revenue Service. Treasury, IRS Provide Guidance on the New Deduction for Car Loan Interest Under the One, Big, Beautiful Bill
4
Federal Register. Car Loan Interest Deduction
5
Thomson Reuters Tax & Accounting News. 2025-2028 Vehicle Loan Interest Deduction: What You Need to Know
6
Internal Revenue Service. Topic No. 510 – Business Use of Car
7
Internal Revenue Service. IRS Publication 463 – Travel, Gift, and Car Expenses
8
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions