What qualifies.
The IRS fact sheet on the new deductions sets out the requirements. Every item on this list has to be true.
- The vehicle is new, and its original use starts with you.
- Final assembly took place in the United States.
- It is for personal use, not business or commercial use.
- Its gross vehicle weight rating is under 14,000 pounds.
- The loan originated after December 31, 2024, and is secured by a lien on the vehicle.
Used vehicles and lease payments do not qualify. If a qualifying loan is refinanced, the IRS says interest on the refinanced amount is generally still eligible.
How much you can deduct.
The deduction is capped at $10,000 of interest a year and applies for 2025 through 2028. Above $100,000 of modified adjusted gross income, or $200,000 jointly, it drops by $200 for each $1,000 over the threshold. It is claimed on the new Schedule 1-A, so it works whether you itemize or take the standard deduction.
The paperwork: Form 1098-VLI and the VIN.
Lenders now issue Form 1098-VLI when they receive $600 or more of interest on a qualifying loan. It shows the interest paid along with the vehicle identification number, year, make, and model. You must include the VIN on the return each year you claim the deduction, so keep the form with your tax records.
If you bought from a Fuquay-Varina or Raleigh dealer in 2025 or 2026, the purchase contract and window sticker are also worth keeping. They help confirm the vehicle was new when the question comes up.
Business vehicles are a different deduction.
A vehicle used in your business does not qualify for this deduction. Business use is handled on the business side, through depreciation or the standard mileage rate. Our article on deductions solopreneurs miss covers the 2026 mileage rates.
North Carolina does not allow it.
The North Carolina Department of Revenue says the General Assembly did not enact a state version of the federal car loan interest deduction, and the state return starts from federal adjusted gross income. The interest stays in North Carolina taxable income.
COMMON QUESTIONS
Questions you may have.
Can I deduct interest on a used car loan?
No. The vehicle has to be new, with its original use starting with you.
Do leases qualify for the car loan interest deduction?
No. Lease payments do not qualify.
Do I need to itemize to deduct car loan interest?
No. The deduction is available whether you itemize or take the standard deduction.
What do I need from my lender?
Form 1098-VLI, which lenders issue when they receive $600 or more of interest. It shows the interest paid and the vehicle identification number you must list on the return.