The One Big Beautiful Bill Act (Pub. L. 119-21, signed July 4, 2025) created IRC § 163(h)(4), which allows taxpayers to deduct interest paid on a loan for a qualifying new motor vehicle from federal taxable income. The deduction is capped at $10,000 per return per year, requires no itemizing, and applies to tax years 2025 through 2028. The vehicle must be new, assembled in the United States, a passenger vehicle, and purchased after December 31, 2024. Married Filing Separately filers do not qualify.
- Cap: $10,000 per return per year. All filing statuses share the same cap under IRC § 163(h)(4).
- Vehicle must be: new (not used), assembled in the United States, a passenger vehicle, purchased after December 31, 2024.
- Above-the-line: available with the standard deduction. No itemizing required. Claimed on Schedule 1-A.
- Phase-out begins at $100,000 MAGI (single/HOH) and $200,000 MAGI (MFJ).
- Phase-out eliminates deduction at $150,000 MAGI single/HOH and $250,000 MAGI MFJ.
- Married Filing Separately: disqualified entirely.
- Leases do not qualify. The vehicle must be purchased with a loan.
- Refinancing a pre-2025 vehicle loan does not create a new qualifying purchase date.
- Assembly location is determined by VIN, not brand or manufacturer country.
- Available TY 2025, 2026, 2027, and 2028 only. Sunsets December 31, 2028.
What Is the Auto Loan Interest Deduction?
IRC § 163(h)(4), enacted as part of the One Big Beautiful Bill Act (Pub. L. 119-21, signed July 4, 2025), allows taxpayers to deduct interest paid on a qualified motor vehicle loan from federal taxable income. The law applies to tax years beginning after December 31, 2024, and sunsets after December 31, 2028.
The deduction is above the line. This means it reduces adjusted gross income (AGI) before the standard deduction is applied. You do not need to itemize deductions on Schedule A to claim it. Taxpayers who take the standard deduction can still benefit.
The deduction is claimed on Schedule 1-A (Additional Deductions), which is filed with Form 1040. The IRS published Schedule 1-A in early 2026 for use with TY 2025 returns.
Qualifying Vehicle Requirements
All four of the following conditions must be met. A vehicle that satisfies three out of four does not qualify.
1. New vehicle only
The vehicle must be purchased new. Used vehicles, pre-owned vehicles, and certified pre-owned vehicles do not qualify, regardless of how recently they were manufactured or whether they were assembled in the United States. A one-year-old vehicle with 15,000 miles purchased from a dealer's pre-owned lot does not qualify.
2. Assembled in the United States
The vehicle must be finally assembled in the United States. Assembly location is determined by the vehicle identification number (VIN), specifically the plant of assembly encoded in the VIN. The manufacturer's country of incorporation, headquarters, or brand origin does not control eligibility.
Several foreign-brand vehicles are assembled in the United States and qualify. Some domestic-brand vehicles are assembled in Canada, Mexico, or elsewhere and do not qualify. Do not assume based on brand. Use the NHTSA VIN decoder at nhtsa.gov to confirm assembly location if uncertain.
3. Passenger vehicle (GVWR under 14,000 lbs)
The deduction is limited to passenger vehicles with a gross vehicle weight rating (GVWR) of less than 14,000 lbs. Standard passenger cars, crossovers, most SUVs, minivans, and most light-duty pickup trucks fall within this threshold. Medium-duty and heavy-duty vehicles at or above 14,000 lbs GVWR are excluded. Check the vehicle's door jamb sticker or manufacturer specifications for the GVWR if uncertain. Note: the 14,000 lb GVWR ceiling under IRC § 163(h)(4) is different from the 6,000 lb threshold used for the IRC § 179 expensing election.
4. Purchased after December 31, 2024
The vehicle must have been purchased after December 31, 2024. The purchase date is the date of sale, not the loan origination date or the delivery date in cases where they differ. Vehicles purchased in 2024 or earlier do not qualify, even if the loan extends through TY 2025 and later years.
Refinancing a pre-2025 vehicle does not create eligibility. If you bought a vehicle in 2023 and refinanced the loan in 2025, the purchase date is still 2023. The vehicle does not qualify under IRC § 163(h)(4) regardless of the refinancing. The purchase date is fixed at the time of original sale.
If you refinanced the loan on a qualifying post-2024 vehicle, the deduction continues to apply. The deductible interest is limited to interest on the original qualified indebtedness (the original purchase loan amount). Interest attributable to cash taken out above the original loan balance in a cash-out refinance does not qualify.
Loan Requirements
The deduction applies to interest paid on a loan used to purchase a qualifying new vehicle. There are no restrictions on the lender type (bank, credit union, manufacturer financing, or other). Interest rate and loan term do not affect eligibility.
The deductible amount is the interest paid, not the principal repayment. Use the annual interest figure from your lender's annual statement or Form 1098-VLI (Vehicle Loan Interest). Starting TY 2026, lenders are required to issue Form 1098-VLI for qualifying vehicle loans. For TY 2025, transitional relief applies and lenders may report on Form 1098 or an equivalent annual statement. Most lenders provide the annual interest statement in January for the prior tax year.
Multiple loans, one cap
If you have two qualifying vehicle loans, the deductible interest from both loans is combined and capped at $10,000 total per return. You cannot claim $10,000 per vehicle or $10,000 per loan. The cap applies to the return.
Leases
Leases do not qualify. A lease is not a loan. The lessee does not own the vehicle and lease payments do not include deductible interest under IRC § 163(h)(4). There is no exception for lease-to-own arrangements where the lessee intends to purchase the vehicle at lease end.
Phase-Out Rules
The deduction is reduced for higher-income taxpayers. The phase-out is linear: $200 of deduction is eliminated for every $1,000 of MAGI above the threshold.
Married Filing Jointly: Phase-out begins at $200,000 MAGI · Eliminated at $250,000 MAGI
Reduction formula: floor((MAGI − threshold) / 1,000) × $200
Final deductible: max(0, min(interest paid, $10,000) − reduction)
| Filing Status | Phase-Out Starts | Phase-Out Eliminates | Reduction Rate |
|---|---|---|---|
| Single | $100,000 MAGI | $150,000 MAGI | $200 per $1,000 |
| Head of Household | $100,000 MAGI | $150,000 MAGI | $200 per $1,000 |
| Married Filing Jointly | $200,000 MAGI | $250,000 MAGI | $200 per $1,000 |
| Married Filing Separately | Disqualified entirely — no deduction available | ||
The phase-out thresholds are not indexed for inflation. They apply at the same MAGI levels for TY 2025, 2026, 2027, and 2028 unless Congress amends the statute.
How This Differs From the Mortgage Interest Deduction
Both deductions are for interest paid. The structural differences are significant.
The mortgage interest deduction under IRC § 163(h)(3) requires itemizing on Schedule A. A taxpayer who takes the standard deduction cannot claim mortgage interest. The auto loan interest deduction under IRC § 163(h)(4) does not require itemizing. A taxpayer can take the standard deduction and still deduct qualifying auto loan interest on Schedule 1-A.
The mortgage interest deduction is permanent (subject to Congressional action). The auto loan interest deduction is temporary: TY 2025 through 2028 only.
Mortgage interest has an income-based phase-out that applies only in specific circumstances (primarily through alternative minimum tax interactions). The auto loan deduction has a direct phase-out starting at $100,000 MAGI for single filers.
The mortgage interest deduction covers interest on up to $750,000 of acquisition debt (or $1 million for pre-December 16, 2017 debt). The auto loan deduction is capped at $10,000 of interest per year regardless of loan balance.
The most significant structural advantage of IRC § 163(h)(4) over the mortgage interest deduction is that IRC § 163(h)(4) is above the line. For a taxpayer taking the standard deduction — which is the majority of U.S. filers — the auto loan interest deduction actually generates a tax benefit where none would exist under the Schedule A itemizing framework. A standard-deduction filer with $5,000 in qualifying auto loan interest and a 22% marginal rate saves approximately $1,100 in federal income tax, receiving a benefit that would not exist under an itemizing-only deduction structure.
How to Claim on Schedule 1-A
The deduction is claimed on Schedule 1-A (Additional Deductions), filed as an attachment to Form 1040. The IRS published Schedule 1-A in early 2026 for use with TY 2025 returns.
To complete Schedule 1-A for the auto loan interest deduction:
- Obtain the annual interest statement from your lender. For TY 2025, lenders may use Form 1098 or an equivalent statement under transitional relief per Notice 2025-57. Starting TY 2026, lenders must use Form 1098-VLI (Vehicle Loan Interest). Identify the total interest paid on the qualifying vehicle loan for the tax year.
- Confirm the vehicle is new, U.S.-assembled, a passenger vehicle, and purchased after December 31, 2024. Keep the purchase contract and the VIN documentation in your records.
- Calculate any phase-out reduction based on your MAGI. If MAGI is below the threshold, no reduction applies. If MAGI is above the threshold, apply the $200-per-$1,000 formula.
- Enter the final deductible amount on Schedule 1-A in the designated field for the qualified motor vehicle loan interest deduction.
- Attach Schedule 1-A to your Form 1040.
For TY 2025, the IRS has not issued specific guidance on documentation requirements for the auto loan deduction beyond the lender interest statement and vehicle eligibility. Retain your purchase contract showing the purchase date, the VIN, and the lender's annual interest statement.
Reporting: Form 1098-VLI
The IRS created Form 1098-VLI (Vehicle Loan Interest) specifically for IRC § 163(h)(4) reporting. Lenders originating qualifying motor vehicle loans are required to file Form 1098-VLI and provide a copy to the borrower starting with TY 2026.
For TY 2025, transitional relief applies under Notice 2025-57. Lenders may use Form 1098 or an equivalent annual interest statement for TY 2025 reporting. The deduction is still fully available for TY 2025 even if your lender does not issue Form 1098-VLI.
When you receive Form 1098-VLI, verify that the VIN reported matches your vehicle and that the interest amount is accurate before entering it on Schedule 1-A. Keep the form with your tax records for at least three years after filing.
If You Use the Vehicle for Business
Self-employed filers and small business owners who use a qualifying vehicle for both personal and business purposes face a coordination rule. Under Notice 2025-57, the same interest cannot be deducted on both Schedule C (or Schedule E/F) and Schedule 1-A. Double deduction of the same interest is not permitted.
The approach is to allocate the interest between business use and personal use based on actual business-use percentage, then deduct each portion on the correct form:
- Business-use portion of interest: deduct on Schedule C (or the applicable business schedule).
- Personal-use portion of interest: eligible for the IRC § 163(h)(4) deduction on Schedule 1-A, subject to the $10,000 cap and phase-out.
Example: A vehicle driven 60% for business and 40% for personal use, with $8,000 annual loan interest. $4,800 (60%) goes on Schedule C. $3,200 (40%) is eligible for Schedule 1-A, subject to MAGI phase-out and the $10,000 cap.
Business-use percentage should be based on mileage logs or another reasonable tracking method. The IRS requires contemporaneous records for vehicle business-use claims. Consult your tax professional if the vehicle serves both purposes.
Combining OBBBA Deductions
IRC § 163(h)(4), IRC § 224 (no tax on tips), and IRC § 225 (no tax on overtime) are three separate deductions. All three can be claimed on the same Schedule 1-A in the same tax year if the taxpayer independently qualifies for each.
The deductions do not interact. Claiming one does not reduce the cap or phase-out threshold of another. Each deduction has its own $10,000 or $12,500/$25,000 cap and its own phase-out calculation. A taxpayer who qualifies for all three uses each deduction's own cap and threshold independently.
W-2 employees who earned qualifying tip income under IRC § 224 can learn more in our No Tax on Tips Guide. Employees who earned qualifying overtime under IRC § 225 can review eligibility and the premium-only rule in our No Tax on Overtime Guide.
Confirmed vs. Pending Guidance
IRC §163(h)(4) is enacted law. Most eligibility rules are confirmed. The key pending items involve lender reporting forms and mixed business/personal use allocation.
Who Benefits Most
Real-World Scenario
Teresa, single filer, TY 2025: Teresa purchased a new Honda Accord assembled in Marysville, Ohio in March 2025. She financed $33,000 at 7.2% interest. Her total qualifying interest paid for TY 2025 was $2,340. Her MAGI is $72,000.
Because her MAGI is below the $100,000 phase-out threshold for single filers, she faces no reduction. She deducts the full $2,340 on Schedule 1-A. At her 22% marginal rate, this reduces her federal income tax by $515.
Teresa takes the standard deduction ($15,750 for single filers in TY 2025). Under prior law, she would have received no deduction for personal auto loan interest. The IRC § 163(h)(4) deduction gives her a tax benefit that previously would have required itemizing.
When the Deduction Does Not Apply
- Used, pre-owned, or certified pre-owned vehicles purchased from any seller.
- Vehicles not assembled in the United States, regardless of brand or model.
- Vehicles purchased before January 1, 2025, regardless of current loan status.
- Vehicle leases. Lease payments are not loan interest under IRC § 163(h)(4).
- Commercial vehicles and trucks primarily used for business.
- Refinanced loans where the original vehicle purchase predates January 1, 2025.
- Married Filing Separately filers: disqualified by statute.
- MAGI at or above $150,000 single/HOH or $250,000 MFJ: deduction reduced to zero by phase-out.
- Tax years 2029 and beyond: deduction sunsets December 31, 2028.
State Tax Conformity
IRC § 163(h)(4) is a federal income tax provision. As of March 2026, most states have not enacted a conforming deduction. If your state has not conformed, your state taxable income remains unchanged by this deduction and you receive no state income tax benefit from the vehicle loan interest.
State conformity is a legislative determination. No IRS or Treasury guidance addresses state treatment of IRC § 163(h)(4). Check your state tax authority's published guidance or consult a tax professional familiar with your state before assuming state savings.
Frequently Asked Questions
- IRC § 163 — Interest Deductions, including § 163(h)(4) Qualified Motor Vehicle Loan Interest (U.S. House, Office of the Law Revision Counsel)
- IRS.gov — IRS Published Schedule Taxpayers Will Use to Claim Deductions on No Tax on Tips, No Tax on Overtime, No Tax on Car Loans, No Tax on Seniors
- IRS.gov — One Big Beautiful Bill Act Provisions
- IRS Schedule 1-A (Form 1040) — Additional Deductions
- NHTSA — Vehicle Identification Numbers (VIN) — Assembly Plant Lookup
Related OBBBA Tools and Guides
Next Step
If you purchased a new U.S.-assembled passenger vehicle after December 31, 2024 and financed it with a loan, use our Auto Loan Interest Deduction Calculator to estimate your federal tax savings. Enter your annual interest paid and MAGI to see the deductible amount after any phase-out reduction.
If your MAGI is approaching the phase-out threshold, run the calculator before filing. At $150,000 MAGI single, the deduction is fully eliminated: the $50,000 excess above the $100,000 threshold, at $200 per $1,000, wipes out the full $10,000 cap. The phase-out is steep — complete elimination for single/HOH filers occurs across a $50,000 MAGI range.
After estimating your deduction, use the Refund Date Estimator to see how a lower federal tax liability may affect your expected refund timing. The auto loan deduction reduces taxable income, which may increase your refund or reduce a balance due.
If you also have tip income, overtime pay, or children who qualify for the Child Tax Credit, multiple OBBBA provisions may apply to your return. See the OBBBA Tax Changes Guide for a side-by-side summary of all six provisions and the stacking rules for Schedule 1-A.