Car Loan Interest Deduction (Form 1098-VLI)

What Is the "No Tax on Car Loan Interest" Deduction?

This new deduction lets eligible taxpayers exclude interest paid on car loans from their taxable income—a first in U.S. tax history. It’s designed to ease the financial burden on working Americans and seniors who rely on personal vehicles for commuting, caregiving, or essential errands.

Think of it like this: if you’re paying interest on a car loan, that interest is now treated like mortgage interest or student loan interest—it’s deductible, meaning it can lower your taxable income and potentially your tax bill.

Who Qualifies?

According to the IRS fact sheet [1], you’re eligible if:

• You’re a U.S. taxpayer with a valid Social Security number.
• Your car was assembled in the United States (this is a new requirement added in the July 25 update [1]).
• The vehicle is used primarily for personal or commuting purposes.
• You’re not claiming the vehicle as a business asset (i.e., it’s not part of a Schedule C business or used for rideshare income).

What Counts as Eligible Interest?

Only interest paid on loans for new vehicles qualifies. That means:

• Lease payments don’t count.
• Refinanced loans are eligible, but only the interest portion.
• You must be the primary borrower—co-signers can’t claim the deduction unless they’re also making payments.
• The interest must be paid on a loan that is originated after December 31, 2024

And yes, you’ll need documentation. Your lender should provide a year-end interest statement, similar to a 1098 for mortgage interest.

Are There Any Catches?

A few:

• Income limits apply. If your adjusted gross income (AGI) is over $100,000 (single) or $200,000 (married filing jointly), the deduction phases out.
• You can’t double-dip. If you’re already deducting vehicle expenses for business use, you can’t also claim this deduction.
• The car must be registered in your name and used at least 50% for personal or commuting purposes.

How Do You Claim It?

To claim the "No tax on car loan interest" deduction, please follow the steps below.

• Federal
• Deductions (Select my forms)
• Additional Deductions
• No Tax on Car Loan Interest

Bonus Tip: What Counts as “Final Assembly in the U.S.”?

This part’s a little tricky. The IRS says the car must be assembled in the U.S., not just sold here [1]. That means vehicles from brands like Ford, GM, Tesla, and even some Toyota and Honda models qualify—if they were built in U.S. plants.

You can check your car’s VIN (Vehicle Identification Number)—if it starts with 1, 4, or 5, it was assembled in the U.S.

One Big Beautiful Bill Act: Tax deductions for working Americans