What Is the Car Loan Interest Deduction?

The One Big Beautiful Bill Act (OBBBA) created a brand-new federal deduction for interest paid on a loan for a new, US-assembled passenger vehicle. Eligible taxpayers can deduct up to $10,000 of interest per year for tax years 2025 through 2028 — and you don't need to itemize to claim it, since it's an above-the-line deduction on the new Schedule 1-A.

How Much Can You Actually Deduct?

Start with whichever is smaller: the interest you actually paid, or the $10,000 annual cap. That figure is then reduced if your income is above the threshold for your filing status.

Capped Interest = MIN( Interest Paid , $10,000 )

Phaseout Reduction = 20% × (MAGI − Threshold)

Final Deduction = MAX( $0 , Capped Interest − Phaseout Reduction )

The threshold is $100,000 of MAGI for single and head-of-household filers, and$ 200,000 for married couples filing jointly. The deduction is reduced by $200 for every$ 1,000 your MAGI sits above that line — disappearing entirely once you're $50,000 over the threshold.

Does Your Vehicle Actually Qualify?

It must be new — used vehicles, salvage titles, and demo units don't qualify
Final assembly must have taken place in the United States (check the vehicle's information label, or look up the VIN)
The loan must have originated after December 31, 2024 and be secured by a first lien on the vehicle
The vehicle must be for personal use — fleet, commercial, and most business-use vehicles don't qualify
Gross vehicle weight must be under 14,000 lbs
Leases don't qualify — this is for purchase loans only

The MAGI Phaseout, Explained Simply

Think of it as losing 20 cents of deduction for every dollar of MAGI above your threshold. A single filer at $100,000 MAGI keeps the full deduction; at$ 125,000, they've lost $5,000 of it; by$ 150,000, it's gone completely. The same math applies to joint filers, just starting at $200,000.

💡 Tip: You can combine interest from more than one qualifying car loan toward the same $10,000 cap — but the MAGI phaseout still applies once, to your total.

Filing Status Matters More Than You'd Think

| Filing Status | Phaseout Starts (MAGI) | Fully Phased Out | |---|---|---| | Single / Head of Household | $100,000 |$ 150,000 | | Married Filing Jointly | $200,000 |$ 250,000 | | Married Filing Separately | Not eligible for this deduction | |

Suppose a single filer paid $12,000 of qualifying interest in 2025 with a MAGI of$ 120,000. The interest is first capped at $10,000. Their MAGI is$ 20,000 over the $100,000 threshold, so the deduction is reduced by 20% ×$ 20,000 = $4,000, leaving a final deduction of$ 6,000. At a 22% marginal rate, that's roughly $1,320 in federal tax savings.

The Car Loan Interest Deduction Calculator helps sole traders, freelancers, and small business owners determine the exact amount of auto loan interest they can claim as a tax deduction. If you use a financed vehicle for both business and personal purposes, tax authorities require you to apportion your interest expenses based on your business use percentage.

How the Deduction is Calculated

The calculation requires two primary pieces of information: the total interest paid on the car loan during the financial year, and the percentage of time the vehicle was used for valid business purposes.

The formula is straightforward:

$\text{Deductible Interest} = \text{Total Annual Interest Paid} \times \text{Business Use Percentage}$

1. Determining Total Annual Interest

Your total annual interest is not your total loan repayment amount. A loan repayment consists of both principal (paying back the original amount borrowed) and interest (the cost of borrowing). You can only claim the interest component as a tax deduction. You can usually find the exact interest paid on your end-of-year loan statement from your financier.

2. Determining Business Use Percentage

To claim the deduction, you must prove how much the car is used for business. This is typically done using a Logbook Method:

You maintain a compliant logbook for a continuous period (e.g., 12 weeks).
You record the odometer readings and the purpose of every trip (business vs. personal).
At the end of the period, you calculate the percentage of total kilometers driven that were strictly for business.
Note: Commuting between your home and your regular place of work is generally considered personal use, not business use.

Worked Example

Imagine you are a freelance photographer who financed a vehicle to travel to client shoots.

Total Car Loan Repayments (Year): $8,000
Principal Paid: $5,500
Interest Paid: $2,500
Logbook Business Use Percentage: 60%

Calculation: $\$2,500 \text{ (Interest)} \times 0.60 \text{ (Business Use)} = \$1,500$

Result: You can claim ** $1,500** as a tax deduction for your car loan interest for that financial year. The remaining$ 1,000 of interest is attributed to your 40% personal use and cannot be claimed.

Limitations and Exclusions

Employees: In many jurisdictions, standard W-2 or PAYG employees cannot claim car loan interest as a deduction, even if they use their car for work. This deduction is generally reserved for self-employed individuals and business entities.
Cents Per Kilometer / Standard Mileage Rate: If you choose to claim your vehicle expenses using a flat "cents per kilometer" or "standard mileage" rate, you usually cannot claim car loan interest on top of it. The flat rate is designed to cover all vehicle expenses, including depreciation, fuel, and interest. You must usually opt for the "actual expenses" method to claim the interest deduction.

Frequently Asked Questions

Can I claim the principal portion of my loan repayment?

No. Repaying the principal is just paying back money you borrowed; it is not an expense. However, you may be able to claim Depreciation (the decline in value) on the cost of the car itself, which is calculated separately from your loan repayments.

Can I claim 100% of the interest if the car is in my business name?

Putting a car loan in a business name does not automatically make the interest 100% deductible. Tax authorities look at the actual use of the vehicle. If you drive the business car for personal errands on weekends, you must still apportion the expenses and reduce your claim by the personal use percentage (or pay fringe benefits tax, depending on your jurisdiction and structure).

How do I find out how much interest I paid this year?

Contact your lender or log into your online finance portal. They will provide an annual statement or an amortization schedule detailing exactly how much of your payments went toward interest versus principal during the tax year. A tax deduction reduces taxable income; it is not the same as a dollar-for-dollar tax credit.

Frequently Asked Questions

What is the car loan interest deduction?

It's a new federal deduction under the OBBBA allowing eligible taxpayers to deduct up to $10,000 per year of interest paid on a loan for a new, US-assembled passenger vehicle, for tax years 2025 through 2028.

How much can I actually deduct?

Whichever is smaller: the interest you paid, or

10,000. That amount is then reduced by 20% of any MAGI above

100,000 (single/HoH) or

200,000 (joint), down to

Does my car need to be made by a US company?

No — what matters is where the vehicle's final assembly took place, not which company makes it. Many foreign brands assemble vehicles in US plants and qualify; some US brands assemble certain models overseas and don't.

Do I have to itemize to claim this deduction?

No. This is an above-the-line deduction claimed on Schedule 1-A, available whether you itemize or take the standard deduction.

Can I claim interest from more than one car loan?

Yes — you can combine eligible interest from multiple qualifying loans, but the combined total is still capped at $10,000 and subject to the same MAGI phaseout.

Does a leased vehicle qualify?

No. Lease payments don't qualify — only interest on a loan used to purchase the vehicle, secured by a first lien.

Can I claim this if I'm married filing separately?

No. Married filing separately is not eligible for the car loan interest deduction.

How do I prove final assembly in the US?

Check the vehicle's information label (Monroney sticker) or look up the VIN — both indicate the plant where final assembly occurred. You must include the VIN on your tax return to claim the deduction.

Methodology

The calculator applies the statutory interest cap first, then subtracts the MAGI phaseout, and clamps the deduction at zero.

Worked Example

For the illustrated single filer, $12,000 of interest is capped at$ 10,000 and the $20,000 MAGI excess reduces the deduction by$ 4,000, leaving $6,000.

Car Loan Interest Deduction Calculator