The New Car Loan Interest Deduction: Up to a $10,000 Deduction (But Read the Fine Print)

Starting in 2025, up to $10,000 of car-loan interest may be deductible on a federal return when the statutory requirements are met, including new-vehicle status, final assembly in the United States, purchase financing rather than a lease, and qualifying personal use. This guide explains the requirements, limitations, records, and separate New Jersey treatment. A model name by itself does not establish final assembly or eligibility.

A headline such as "Deduct your car loan interest" does not make every car payment deductible. The provision applies only to qualified interest under its own requirements, and New Jersey does not provide a corresponding Gross Income Tax deduction. Compute the federal and New Jersey returns separately; the completed returns determine each result.

IRC citations, thresholds, and phaseout numbers were last reviewed September 2026. The regulatory citations reflect the final regulations under Section 163(h)(4) (TD 10054, released September 4, 2026 and scheduled for Federal Register publication September 8, 2026), which carried the proposed rules' related-party exclusion, per-return cap, and mixed-use allocation forward without substantive change.

In This Article

1. What IRC Section 163(h)(4) Actually Says
2. Which Vehicles Qualify (and Which Do Not)
3. How to Verify US Assembly: Window Stickers and VIN Decoders
4. The $10,000 Cap and How It Works
5. Income Phaseouts: The Math That Reduces Your Deduction
6. Lease vs. Purchase: Why Leases Do Not Qualify
7. Refinancing Rules
8. Business vs. Personal Use Allocation
9. Where to Claim It: Schedule 1-A, Part IV
10. NJ Non-Conformity: Why This Deduction Does Not Exist on Your State Return
11. Worked Examples at Different Income Levels
12. Frequently Asked Questions

What IRC Section 163(h)(4) Actually Says

Section 163(h)(4) of the Internal Revenue Code was added by the One Big Beautiful Bill Act (OBBBA, Public Law 119-21), signed July 4, 2025. It creates a below-the-line deduction for qualified motor vehicle loan interest. Below-the-line means it reduces taxable income but does not reduce AGI - you do not need to itemize to claim it. On the final 2025 form, the deduction is figured in Schedule 1-A, Part IV; the total additional deductions on Schedule 1-A, line 38, flow to Form 1040 or 1040-SR, line 13b.

The provision is temporary. It applies to tax years 2025 through 2028 only. Unless Congress extends it, the deduction disappears after December 31, 2028. Four tax years. That is the window.

Key statutory requirements:

• The interest must be on a loan used to purchase a qualified motor vehicle
• The vehicle must be new (not used, not certified pre-owned)
• The vehicle must be assembled in the United States (final assembly, not just parts sourced domestically)
• The loan must be secured by a first lien on the vehicle, and the vehicle's original use must begin with the taxpayer (a genuinely new vehicle, not one first placed in service by someone else)
• The vehicle must have at least two wheels, a VIN, and a gross vehicle weight rating below 14,000 pounds
• Expected use must be primarily personal - the final regulation tests expected personal use at loan inception; expected personal use above 50% passes the gate. Under Treas. Reg. §1.163-16(g), independently deductible business-use interest may be treated as qualified passenger vehicle loan interest or deducted under the otherwise-applicable business rule, but the same interest cannot be deducted twice. Expected personal use of 50% or less fails the gate, so a purely business vehicle does not qualify for this deduction
• Maximum deduction: $10,000 per year
• Filing status: the $10,000 cap is per federal return. Married filing jointly couples share one $10,000 cap. Per Treas. Reg. §1.163-16(h)(1) and Spidell guidance, MFS filers each get their own $10,000 cap on their respective returns
• Subject to income-based phaseouts

Which Vehicles Qualify (and Which Do Not)

The statute uses the term "qualified motor vehicle," which is defined specifically. This is not the same as the definition used for the clean vehicle credit under Section 30D or the definition used for Section 179 vehicle deductions. Each tax provision defines vehicles differently, so apply the definition for the provision being claimed.

Vehicles that qualify (per IRC §163(h)(4) as added by OBBBA §70203):

• New cars, minivans, vans, SUVs, pickup trucks, and motorcycles with final assembly in the United States
• Both traditional internal combustion engine (ICE) vehicles and electric vehicles (EVs), as long as they meet the assembly requirement
• Must have at least two wheels (including motorcycles, cars, SUVs, and pickup trucks). The statute requires at minimum two wheels and explicitly lists motorcycles alongside four-wheeled vehicles. ATVs, boats, aircraft, and recreational vehicles do NOT qualify.

Vehicles that do NOT qualify:

• Used vehicles - regardless of age, mileage, or condition. A one-year-old certified pre-owned vehicle with 3,000 miles does not qualify
• Leased vehicles - even if the lease is on a brand-new US-assembled vehicle
• Vehicles assembled outside the United States - for example, a specific vehicle whose VIN and final-assembly label show Georgetown, Kentucky may meet the assembly requirement, while one whose records show Guanajuato, Mexico does not
• Vehicles with 50%-or-less expected personal use - under Treas. Reg. §1.163-16(f), the gate is expected use when the loan is taken out: more than 50% expected personal use passes, 50% or less fails. Claiming business deductions (Section 179, MACRS, actual expenses) does not by itself disqualify a mixed-use vehicle that passes the gate - the same interest simply cannot be deducted twice
• Recreational vehicles, boats, aircraft - not qualified motor vehicles under this section

The "Assembled in the United States" Requirement

"Assembled in the United States" means final assembly occurred at a plant located in the United States. It does not mean every part was made in America or that the brand is American. Verify where the specific vehicle was finally assembled.

Illustrative assembly outcomes - verify the specific VIN and final-assembly label:

• A BMW X5 whose records show final assembly in Spartanburg, South Carolina meets the assembly-location requirement
• A Volkswagen Atlas whose records show final assembly in Chattanooga, Tennessee meets the assembly-location requirement
• A Honda Accord whose records show final assembly in Marysville, Ohio meets the assembly-location requirement
• A Chevrolet Equinox EV whose records show final assembly in Ramos Arizpe, Mexico does not meet the assembly-location requirement
• A Ford Maverick whose records show final assembly in Hermosillo, Mexico does not meet the assembly-location requirement

For this requirement, the specific vehicle's final-assembly record controls; its brand and model name are not enough.

Verification point: New-vehicle status alone is not enough. The vehicle must have final assembly in the United States, so review the specific VIN and final-assembly label before relying on the deduction.

How to Verify US Assembly: Window Stickers and VIN Decoders

Before relying on this deduction, verify the specific vehicle's assembly location using the available records:

Method 1: The Monroney Sticker (Window Sticker)

Every new vehicle sold in the United States is required by federal law (the American Automobile Labeling Act, 49 USC Section 32304) to display a window sticker showing the final assembly point. The label reads "Final Assembly Point" followed by a city and state (if US) or country. If your vehicle has already been purchased, your dealer can provide a copy, or you can request one from the manufacturer.

Method 2: VIN Decoder

Use the NHTSA VIN Decoder (opens in a new tab) to identify the specific vehicle's reported plant and final-assembly information. Enter the full 17-digit VIN and review the plant fields. Do not treat the VIN's first character by itself as conclusive proof of final assembly: it is part of the World Manufacturer Identifier, while qualification turns on where the specific vehicle was finally assembled.

Important: Vehicles sold under the same model name can have different final-assembly locations. Two otherwise similar vehicles can therefore have different results under the assembly-location requirement. Always check the specific VIN and final-assembly label, not just the model name.

The $10,000 Cap and How It Works

The maximum deduction is $10,000 per tax return per year. This is not per vehicle - it is per return. If you finance two qualifying vehicles, your combined interest deduction is still capped at $10,000.

What counts as interest:

• Interest paid on the auto loan during the tax year
• Only interest - not principal, not fees, not gap insurance, not extended warranties
• For 2025, the lender reports interest on a permitted year-end lender statement under transition relief (not the generic Form 1098, which is for mortgage interest); for calendar-year 2026, a dedicated Form 1098-VLI is introduced for vehicle-loan interest

What does not count:

• Dealer documentation fees
• Title and registration fees
• Sales tax on the vehicle purchase
• Late payment fees or penalties
• Capitalized interest (interest added to the loan balance rather than paid)

Actual annual interest depends on the loan balance, stated rate, payment timing, and amortization. The deductible amount is limited to qualified interest actually paid and may be below the statutory cap.

Income Phaseouts: The Math That Reduces Your Deduction

The deduction phases out at higher income levels. The phaseout is based on modified adjusted gross income (MAGI).

Phaseout thresholds:

How the phaseout works:

For every $1,000 (or fraction thereof) that your MAGI exceeds the phaseout threshold, your maximum deduction is reduced by $200. The math is straightforward:

• At $100,000 MAGI (single): full $10,000 deduction available
• At $110,000 MAGI (single): deduction reduced by $2,000 → max $8,000
• At $125,000 MAGI (single): deduction reduced by $5,000 → max $5,000
• At $150,000 MAGI (single): deduction reduced by $10,000 → max $0 (fully phased out)

For MFJ filers, the same $200-per-$1,000 reduction applies starting at $200,000 MAGI:

• At $200,000 MAGI (MFJ): full $10,000 deduction available
• At $220,000 MAGI (MFJ): deduction reduced by $4,000 → max $6,000
• At $250,000 MAGI (MFJ): deduction reduced by $10,000 → max $0 (fully phased out)

MFS treatment: Unlike §224 (tips), §225 (overtime), and the senior deduction - all of which expressly require joint filing for married taxpayers - the car-loan interest deduction has no joint-filing requirement. IRS guidance confirms married taxpayers need not file jointly to claim it, and Treas. Reg. §1.163-16(h)(1) gives each MFS spouse their own $10,000 cap on their respective returns. Compare complete returns before drawing a filing-status conclusion because MFS changes eligibility for the tips, overtime, and senior deductions and other joint-filing benefits.

Planning tip: The $10,000 cap is per return, not per vehicle. A married couple filing a joint return with two qualifying car loans still has one $10,000 cap on that joint return; married-filing-separately treatment is described above.

Lease vs. Purchase: Why Leases Do Not Qualify

Section 163(h)(4) applies to "interest on any loan" used to purchase a qualified motor vehicle. A lease is not a loan. When you lease a vehicle, you do not own it - the leasing company does. The monthly payment includes a depreciation component and a money factor (the lease equivalent of interest), but the money factor is not deductible interest under Section 163(h)(4).

If a vehicle was leased rather than purchased with qualifying debt, the interest-equivalent portion of the lease payment does not qualify under Section 163(h)(4). Apply the separate rules if the arrangement is later converted into a purchase.

What about a lease buyout? If you exercise your purchase option at the end of a lease and finance the buyout with a loan, the vehicle is no longer "new" at that point. It is a used vehicle - you have been driving it for two or three years. Used vehicles do not qualify. The buyout loan interest is not deductible under Section 163(h)(4).

Refinancing Rules

If you refinance your original auto loan, the interest on the refinanced loan generally continues to qualify - as long as the refinanced amount does not exceed the remaining balance of the original qualifying loan. If you do a cash-out refinance (borrowing more than the remaining balance), only the interest attributable to the original loan balance qualifies. The interest on the excess cash-out portion does not.

Example: You purchased a qualifying vehicle with a $45,000 loan. After 18 months, the balance is $38,000. You refinance for $38,000 at a lower rate. All interest on the refinanced loan qualifies. If you instead refinanced for $45,000 (taking $7,000 cash out), only the interest attributable to $38,000 qualifies. You would need to allocate interest proportionally: ($38,000 / $45,000) x total interest paid = qualifying interest.

Business vs. Personal Use Allocation

Section 163(h)(4) is a personal interest deduction. If you use the vehicle partly for business and partly for personal purposes, you need to allocate.

If you claim the vehicle on Schedule C (business use):

• Business-use interest is deductible as a business expense under Section 163 (separate from Section 163(h)(4))
• Personal-use interest is potentially deductible under Section 163(h)(4)
• Under Treas. Reg. §1.163-16(g), allocation is elective: a taxpayer who passes the personal-use gate may treat ALL otherwise-eligible interest as personal-use interest under Section 163(h)(4), or instead deduct an allocable business share and treat the balance as personal - the only hard rule is that the same dollars cannot be deducted twice. If you allocate, maintain a mileage log or other records to support the split

Example: Your qualifying vehicle is used 70% for personal and 30% for business. Total loan interest for the year is $4,000. One permitted approach deducts the business portion ($1,200) on Schedule C and the personal portion ($2,800) on Schedule 1-A under Section 163(h)(4), subject to the $10,000 cap and income phaseouts; under §1.163-16(g) the taxpayer could instead elect to treat the full $4,000 as Section 163(h)(4) interest (with no Schedule C interest deduction) - never both.

The catch: A vehicle with expected personal use of 50% or less at loan inception fails the regulatory gate entirely - a 100%-business vehicle therefore generates no Section 163(h)(4) interest, and the entire interest amount is analyzed under the business rules on Schedule C. The gate is measured by expected use when the debt is incurred, not by which depreciation method you later claim.

For a deeper dive on business vehicle deductions, see my Section 179 and Bonus Depreciation in NJ guide.

Where to Claim It: Schedule 1-A, Part IV

The car loan interest deduction is claimed on the final 2025 Schedule 1-A (Form 1040), Part IV. Line 22 requires the VIN and separates interest deducted on Schedule C, E, or F from the amount used on Schedule 1-A. The qualified passenger vehicle loan interest deduction is computed on line 30; all Schedule 1-A deductions are totaled on line 38 and carried to Form 1040 or 1040-SR, line 13b. They reduce taxable income but do not reduce AGI. Schedule 1-A is separate from Schedule 1 (Additional Income and Adjustments to Income).

For the full walkthrough of Schedule 1-A and all four parts, see my Schedule 1-A Guide.

What you need to file:

• The 2025 year-end lender statement (transition relief) or, for 2026, Form 1098-VLI from your lender showing interest paid - not the generic mortgage-interest Form 1098
• The vehicle identification number (VIN), which must be reported on Schedule 1-A, line 22, plus records supporting final assembly in the United States
• Purchase agreement showing the vehicle was new
• Mileage log if you split business/personal use

The deduction flows from Schedule 1-A to Form 1040, reducing your taxable income (not AGI). This is a below-the-line deduction - it does not affect AGI-based calculations like education credits, IRA deduction limits, or ACA premium subsidies.

NJ Non-Conformity: Why This Deduction Does Not Exist on Your State Return

New Jersey does not conform to IRC Section 163(h)(4). A New Jersey resident therefore computes the federal deduction and the New Jersey Gross Income Tax base under separate rules.

New Jersey Gross Income Tax is computed under its own enumerated-income and deduction rules rather than from federal taxable income. The federal qualified passenger vehicle loan interest deduction is not an NJ Gross Income Tax deduction. See the NJ OBBBA Conformity Guide for provision-by-provision treatment rather than treating the federal act as a single conformity package.

What this means in practice:

• Your federal return shows the Section 163(h)(4) deduction on Schedule 1-A
• Your NJ-1040 does not recognize this deduction
• Because the federal deduction does not reduce AGI, there is no dollar-for-dollar comparison between NJ taxable income and federal AGI based on this deduction; the NJ base is computed separately
• The return effect depends on the independently computed federal taxable income and NJ Gross Income Tax base

For a complete analysis of which OBBBA deductions NJ does and does not follow, see my NJ OBBBA Conformity Guide.

Worked example (NJ resident):

Assume Sarah, a single filer in Livingston, NJ, earns $90,000, pays $3,200 in interest on a new Honda CR-V, and has a VIN and final-assembly label showing East Liberty, Ohio, together with records satisfying the other requirements. She claims the full $3,200 on her federal Schedule 1-A. Under the stated assumptions, her federal taxable income drops by $3,200 (this is a below-the-line deduction, so AGI remains $90,000), and a 22% marginal-rate illustration produces approximately $704 of federal tax reduction. The federal deduction does not produce an NJ Gross Income Tax deduction; the complete federal and NJ returns determine the actual results.

Worked Examples at Different Income Levels

Example 1: Single Filer, $75,000 MAGI

• Assumed vehicle record: a 2026 Toyota Camry whose VIN and final-assembly label show Georgetown, Kentucky
• Loan: $35,000 at 7.0%; interest shown as one year of simple interest on the full original balance (an amortizing loan pays somewhat less)
• Interest paid: approximately $2,450
• Phaseout: none (below $100,000 threshold)
• Federal deduction: $2,450
• Federal tax savings at 22%: approximately $539
• NJ tax savings: $0 (NJ does not conform)

Example 2: Married Filing Jointly, $180,000 MAGI

• Assumed vehicle record: a 2026 Hyundai Palisade whose VIN and final-assembly label show Ulsan, South Korea
• This vehicle does NOT meet the assembly requirement under the stated record
• Federal deduction: $0
• Lesson: always check the VIN before relying on this deduction

Example 3: Married Filing Jointly, $225,000 MAGI

• Assumed vehicle record: a 2026 Ford F-150 whose VIN and final-assembly label show Dearborn, Michigan
• Loan: $55,000 at 6.5%; interest shown as one year of simple interest on the full original balance (an amortizing loan pays somewhat less)
• Interest paid: approximately $3,575
• Phaseout calculation: MAGI exceeds $200,000 by $25,000 → reduction of $5,000
• Maximum deduction after phaseout: $10,000 - $5,000 = $5,000
• Actual interest ($3,575) is below the phased-out cap ($5,000)
• Federal deduction: $3,575
• Federal tax savings at 22%: approximately $787
• NJ tax savings: $0

Example 4: Single Filer, $145,000 MAGI

• Assumed vehicle record: a 2026 Tesla Model Y whose VIN and final-assembly label show Austin, Texas
• Loan: $48,000 at 6.0%
• Interest paid: approximately $2,880
• Phaseout calculation: MAGI exceeds $100,000 by $45,000 → reduction of $9,000
• Maximum deduction after phaseout: $10,000 - $9,000 = $1,000
• Actual interest ($2,880) exceeds phased-out cap ($1,000)
• Federal deduction: $1,000
• Federal tax savings at 24%: approximately $240
• NJ tax savings: $0
• Note: at $150,000 MAGI, the deduction would be fully phased out ($0)

Example 5: Single Filer, $95,000 MAGI, Two Vehicles

• Assumed vehicle record 1: a 2026 Chevrolet Silverado whose VIN and final-assembly label show Fort Wayne, Indiana - $2,100 interest
• Assumed vehicle record 2: a 2026 Subaru Outback whose VIN and final-assembly label show Lafayette, Indiana - $1,800 interest
• Combined interest: $3,900
• Cap: $10,000 (not exceeded)
• Federal deduction: $3,900
• Federal tax savings at 22%: approximately $858

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Related reading: Schedule 1-A Complete Guide | NJ OBBBA Conformity Guide | No Tax on Overtime in NJ | Section 179 and Bonus Depreciation in NJ | OBBBA Tax Changes for NJ Filers