Taxpayers may be able to claim a federal tax deduction for interest paid on certain personal auto loans. The deduction became available beginning in 2025 under the One Big Beautiful Bill Act (OBBBA), and the IRS has now issued final regulations that clarify how the deduction works.
If you are considering purchasing a new vehicle or expect to claim the deduction on your 2026 federal income tax return, it is important to understand the requirements.
Who qualifies for the deduction?
The deduction is available for interest paid on a loan used to purchase a qualifying vehicle for personal use. Taxpayers do not need to itemize deductions to claim it.
To qualify:
- The loan must be incurred after December 31, 2024.
- The debt must be secured by a first lien on the vehicle.
- The vehicle must be purchased new. Used and leased vehicles do not qualify.
- The vehicle must be assembled in the United States.
- The vehicle must be intended for personal use.
Eligible vehicles generally include cars, minivans, vans, sport utility vehicles, pickup trucks, and motorcycles with a gross vehicle weight rating under 14,000 pounds.
Understanding the deduction limits
The deduction is generally capped at $10,000 per year. However, many taxpayers may not reach that limit because the deduction is based on the actual amount of qualifying interest paid during the year.
Income can also reduce or eliminate the deduction.
The phaseout begins when modified adjusted gross income (MAGI) exceeds:
- $100,000 for individual filers
- $200,000 for married couples filing jointly
The deduction is reduced by $200 for every $1,000, or fraction of $1,000, above those thresholds. Once MAGI reaches $150,000 for individual filers or $250,000 for joint filers, the deduction is no longer available.
It is also important to remember that deductions reduce taxable income, not taxes dollar for dollar.
Key changes in the final regulations
The IRS made several updates after reviewing public comments on the proposed regulations.
Additional costs that may qualify
The final regulations clarify that qualifying vehicle loans may include certain costs commonly financed as part of the purchase transaction, including:
- Guaranteed asset protection (GAP) coverage
- Credit insurance products
- Repair plans
- Vehicle protection products
- Key fob replacement plans
- Certain vehicle accessories
The IRS notes that these costs must be directly related to the vehicle purchase and customarily financed in the transaction.
Negative equity still does not qualify
Many taxpayers roll negative equity from a trade-in vehicle into a new auto loan. Negative equity occurs when the remaining loan balance exceeds the vehicle’s value.
The final regulations keep the IRS position that interest attributable to negative equity does not qualify for the deduction. Taxpayers must allocate interest between qualifying and nonqualifying debt when negative equity is part of the financing arrangement.
Clarification on demonstrator vehicles
The IRS also addressed dealer demonstrator vehicles. In some states, these vehicles may be titled or registered before sale.
Under the final regulations, a demonstrator vehicle may still qualify as a new vehicle if it is held primarily for sale to customers and the financing documentation treats it as new.
Personal use requirement
The personal use test applies when the debt is incurred. At that time, taxpayers must reasonably expect that they, a spouse, or certain relatives will use the vehicle for personal purposes more than 50% of the time during the anticipated ownership period.
A later change in actual use generally will not affect the original determination.
Planning ahead
This deduction is currently temporary and is scheduled to apply through 2028 unless Congress extends it. Taxpayers who plan to claim the deduction should carefully review vehicle eligibility, financing arrangements, and documentation requirements. For example, taxpayers must include the vehicle identification number (VIN) on each tax return for which the deduction is claimed. Because the rules contain several technical requirements, consulting with a qualified tax advisor before purchasing a vehicle or filing a return may help avoid costly mistakes.
At BeachFleischman, we help clients understand tax law changes and evaluate how new opportunities may fit their financial goals. Contact us today!
Frequently Asked Questions
Do I need to itemize deductions to claim the auto loan interest deduction?
No. The deduction is available to both taxpayers who claim the standard deduction and those who itemize deductions.
What vehicles qualify for the deduction?
Qualifying vehicles generally include new cars, minivans, vans, SUVs, pickup trucks, and motorcycles under 14,000 pounds that are assembled in the United States and purchased for personal use.
Does interest related to negative equity qualify?
No. Interest attributable to negative equity that is rolled into a new vehicle loan does not qualify for the deduction under the final regulations.
How does income affect eligibility?
The deduction begins to phase out when MAGI exceeds $100,000 for individual filers or $200,000 for married couples filing jointly and may be eliminated entirely at higher income levels.
©2026
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