Is Car Loan Interest Tax Deductible? New Tax Rules Explained
Written by
Rudri Bhatt Patel, CFHC™
Edited by
Joe Evans, CFHC™
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
If you’re wondering is car loan interest tax-deductible, the answer depends on how you use the vehicle — and when you bought it.
For years, car loan interest wasn’t deductible for personal vehicles. It was treated as personal interest, which generally isn’t eligible for a tax break under Internal Revenue Service rules. But that changed — temporarily.
Under a new federal law passed for tax years 2025 through 2028, some taxpayers may deduct up to $10,000 in car loan interest, provided they meet specific requirements.
Let’s break down exactly who qualifies:
Car Loan Interest Deduction: At a Glance
Situation Deductible? Personal car (pre-2025 purchase) No New car purchased 2025-2028 (meets rules) Yes, up to $10,000 Used vehicle No Lease No Self-employed (business use) Yes, business portion only Employee commuting No
Why Car Loan Interest Usually Wasn’t Deductible
Historically, the IRS classified car loan interest as personal interest. And personal interest generally isn’t deductible under Section 163 of the Internal Revenue Code.
That means:
- Commuting to work? Not deductible.
- Running personal errands? Not deductible.
- Driving to school? Not deductible.
The New 2025 to 2028 Car Loan Interest Deduction
Under the new law (effective for vehicles purchased after December 31, 2024), taxpayers may deduct up to $10,000 in car loan interest — even for personal use.
But there are limits.
Vehicles That Qualify
To claim the deduction, the vehicle must:
- Be new, not used
- Be purchased after December 31, 2024, and before January 1, 2029
- Have final assembly in the United States
- Weigh less than 14,000 pounds
- Be primarily for personal use (50% or more)
If any of those aren’t met, the deduction doesn’t apply.
Income Limits and Phase-Out Rules
The deduction phases out at higher income levels.
| Filing Status | Full Deduction | Phase-Out Range | Ineligible |
|---|---|---|---|
| Single | Up to $100,000 | $100,001 to $150,000 | $150,000+ |
| Head of Household | Up to $100,000 | $100,001 to $150,000 | $150,000+ |
| Married Filing Jointly | Up to $200,000 | $200,001 to $250,000 | $250,000+ |
| Married Filing Separately | Up to $100,000 | $100,001 to $150,000 | $150,000+ |
If your modified adjusted gross income exceeds the top limit, you won’t qualify.
Do You Need to Itemize?
No. The new car loan interest deduction is structured as an above-the-line deduction, meaning you can claim it even if you take the standard deduction. That lowers your adjusted gross income (AGI) directly.
When Car Loan Interest Is Deductible for Business Use
This rule hasn’t changed. If you’re self-employed and use your vehicle for business purposes, you can deduct the business-use portion of your car loan interest.
How to Calculate Business-Use Interest
Follow these steps:
- Find total interest paid during the year
- Determine business-use percentage (based on mileage logs)
- Multiply interest by business-use percentage
Example:
- $1,500 annual interest
- 40% business use
$1,500 ?– 40% = $600 deductible
You report this on Schedule C.
What Counts as Business Driving?
Eligible business use includes:
- Driving to clients
- Temporary work sites
- Business errands
- Between job locations
Not eligible:
- Commuting from home to your regular office
Self-Employed vs. W-2 Employee Comparison
| Category | Self-Employed | W-2 Employee |
|---|---|---|
| Can deduct business-use interest | Yes | No |
| Can deduct commuting interest | No | No |
| Eligible for 2025-2028 personal deduction | Yes (if qualified) | Yes (if qualified) |
Even if you use your car 100% for work as a W-2 employee, you generally can’t deduct car loan interest unless you qualify under the new temporary rule.
When Car Loan Interest Is NOT Deductible
You can’t deduct car loan interest if:
- The vehicle is used
- The vehicle is leased
- The vehicle exceeds 14,000 pounds
- You exceed income limits
- You’re claiming commuting as business use
Real-World Examples
New Car Purchase in 2026
A taxpayer buys a new U.S.-assembled car in March 2026 and pays $6,500 in interest. If their income is below $100,000 (single), they may deduct the full $6,500.
Self-Employed Consultant
A consultant uses her car 70% for client travel. She can deduct 70% of her annual interest payments on Schedule C.
W-2 Employee Commuting
An employee driving to the office daily can’t deduct interest for commuting.
Records You Should Keep
To support the deduction:
- Loan statements
- Form 1098 (if issued)
- Purchase agreement
- Window sticker (showing final assembly)
- Mileage logs (for business use)
The Internal Revenue Service generally recommends keeping tax records for at least three years.
Common Mistakes
- Claiming used vehicles
- Claiming commuting as business mileage
- Deducting 100% when vehicle is partially personal
- Ignoring income phaseouts
Overstating vehicle deductions can increase audit risk.
Final Take to GO
So, is car loan interest tax-deductible? Usually, no. But from 2025 through 2028, it might be. If you bought a new U.S.-assembled vehicle after December 31, 2024, and your income falls within the limits, you may qualify for up to $10,000 in interest deductions.
If you’re self-employed, you’ve always been able to deduct the business-use portion, as long as you keep good records.
Before you buy a car just for the deduction, run the numbers. A tax break shouldn’t drive the purchase — your budget should.
FAQ
Car loan interest rules changed recently, which has created confusion. Here are answers to common questions about whether car loan interest is tax-deductible.- Is car loan interest tax-deductible in 2025?
- Yes, for certain new vehicles purchased after December 31, 2024, if income and eligibility rules are met.
- Can I deduct interest on a used car loan?
- No. The temporary personal deduction applies only to new vehicles.
- What if I use my car for both business and personal use?
- You can deduct only the portion of interest tied to business use.
- Do leases qualify?
- No. A lease isn’t a loan, so there’s no interest deduction.
- Do I need to itemize?
- No. The temporary deduction is above-the-line and doesn’t require itemizing.
- What records should I keep?
- Loan statements, purchase documents and mileage logs for business use.
Data is accurate as of Feb. 17, 2026, and is subject to change.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- IRS. "Topic no. 510, Business use of car"
- IRS. "2024 Instructions for Schedule C"
- IRS. "2023 Instructions for Schedule C (2023)"
- IRS. "IRS issues standard mileage rates for 2024; mileage rate increases to 67 cents a mile, up 1.5 cents from 2023"
- IRS. "Topic no. 505, Interest expense"
- IRS. "Publication 463 (2023), Travel, Gift, and Car Expenses"
