New Tax Break for Car Buyers: Deducting Auto Loan Interest in 2026

How the New Temporary Auto Loan Interest Deduction Works and Who Qualifies

Buying a car is one of the biggest financial decisions most Americans make, and beginning in the 2025 tax year (filed in 2026), qualifying taxpayers can benefit from a brand-new temporary deduction:
a deduction for interest paid on a new vehicle loan, up to $10,000.

This new tax break is designed to ease the burden of rising auto loan rates and help working families who need dependable transportation. If you plan to purchase a new vehicle, this deduction could significantly reduce your taxable income and increase your refund.

Below is a complete breakdown of how the deduction works, who qualifies, and what documentation you will need to claim it.

What Is the 2026 Auto Loan Interest Deduction?

Beginning with the 2025 tax year, taxpayers can deduct up to:

• $10,000 in interest paid on a qualifying new vehicle
• Available once per taxpayer
• Available even if you take the standard deduction

This makes it one of the most accessible “above-the-line” style deductions available during the 2026 filing season.

The deduction applies only to interest, not principal payments, and only for new vehicles purchased within the qualifying time frame.

Which Vehicles Qualify for the Deduction?

To qualify, the car must meet all of the following requirements:

• Brand new at the time of purchase
• Purchased between January 1, 2025 and December 31, 2025
• Not previously titled or owned
• Financed with a legitimate auto loan
• Purchased for personal use (not claimed as a business asset)

New cars purchased in early 2026 do not qualify.
The law specifically covers vehicles bought during the 2025 calendar year.

Both gasoline and electric vehicles qualify, as do SUVs and trucks, as long as they meet the “new” requirement.

Income Limits and Phase-Out Rules

Like many tax benefits, this deduction includes income caps to guarantee the relief targets lower- and middle-income households.

Deductions may phase out based on your Adjusted Gross Income (AGI):

• Full deduction available below the lower AGI threshold
• Partial deduction available within the phase-out range
• No deduction once the AGI upper limit is reached

Exact numbers may vary depending on IRS guidance and filing status, but most middle-income families will qualify for either the full or partial deduction.

If you are married filing jointly, income thresholds are generally higher, allowing more families to claim the benefit.

How to Calculate the Deductible Interest

Only interest paid during 2025 counts toward the deduction.

This means:

• If you purchase a new car in January 2025, you’ll have nearly a full year of interest to claim.
• If you purchase in December 2025, you may only have one month of deductible interest.
• The maximum deduction is $10,000, not guaranteed. Your actual deduction depends on the interest you paid.

Your monthly statements, loan agreement, and lender interest summaries will show the exact amount of interest paid in the year.

Required Documentation to Claim the Auto Loan Interest Deduction

Taxpayers must maintain proof of loan interest paid, vehicle eligibility, and date of purchase. You should gather:

1. Auto Loan Agreement

Shows:

• Vehicle details
• Interest rate
• Loan terms
• Loan origination date

2. Lender’s Annual Interest Statement

Many lenders issue an annual year-end summary similar to a 1098 mortgage form, breaking out the interest portion of each payment.

3. Purchase Contract / Buyer’s Order

Verifies:

• Vehicle is new
• Purchase date
• Out-the-door cost
• VIN and dealership information

4. Payment Receipts or Bank Records

Shows interest actually paid during the tax year.

5. IRS Form 1040 and Associated Worksheets

The IRS will provide updated instructions and worksheets for calculating the deductible amount.

Keep these documents for at least three years in case of IRS review.

Does This Deduction Require Itemizing?

No.

This deduction is available whether you:

• Claim the standard deduction, or
• Itemize your deductions

This makes it significantly more accessible than traditional vehicle-related tax benefits.

Even taxpayers with no itemized deductions can still take advantage of the auto loan interest deduction.

How Much Can This Deduction Save You?

Savings depend on your tax bracket and how much interest you paid.

Estimated Tax Savings Based on Full $10,000 Interest Deduction

For families facing high auto loan rates, this deduction can provide substantial relief.

Who Will Benefit the Most?

This tax break most strongly supports taxpayers who:

• Buy a new vehicle in 2025
• Have higher interest rates on their auto loan
• Have moderate to middle income
• File with the standard deduction
• Need reliable transportation for work or family

It is especially impactful for:

• Working families
• Commuters
• Essential workers
• First-time car buyers
• Households upgrading to safer or more efficient vehicles

Steps to Claim the Auto Loan Interest Deduction in 2026

To ensure a smooth filing experience:

1. Buy a brand-new vehicle in 2025
2. Keep all loan and dealership paperwork
3. Track your monthly interest payments
4. Verify your AGI fits the income eligibility rules
5. Use updated software or IRS instructions for 2026 filing
6. File electronically and double-check your interest totals

Accurate documentation will be key to avoiding delays.

Final Takeaway

The temporary auto loan interest deduction gives car buyers a rare opportunity to deduct up to $10,000 in interest on a new car purchased in 2025. With rising vehicle prices and higher loan rates, this tax break offers meaningful relief for middle-income households during the 2026 filing season.

By understanding the income caps, purchase window, and documentation required, taxpayers can take full advantage of this new benefit and increase their refund next year.