Article: 50650
Overview
You may be eligible to take a federal income tax deduction for qualified passenger vehicle loan interest (the “no tax on car loan interest” provision of the new tax bill). This allows eligible taxpayers to deduct certain interest paid on a qualified vehicle loan from federal taxable income.
The “No Tax on Car Loan Interest” rule does not make car loans or vehicle purchases tax-free. It is a federal income tax deduction for qualifying vehicle loan interest that you can claim (if eligible) when you file your tax return.
The deduction:
- is claimed on Schedule 1-A – Additional Deductions as a federal income tax deduction.
- is up to $10,000 per return.
- can be claimed by both itemizing and non-itemizing taxpayers.
- is not available for taxpayers who file Married Filing Separately (MFS).
- is subject to a Modified Adjusted Gross Income (MAGI) phase-out beginning at $150,000 ($300,000 MFJ). The deduction may be reduced or eliminated for higher-income taxpayers.
Qualified Vehicle Loan Interest
To qualify, the interest must generally:
- be paid on a loan secured by a qualified passenger vehicle.
- relate to a vehicle that is new, not previously placed in service.
- be for a vehicle purchased for personal use (not primarily for business or investment).
- be paid on a loan entered into during the period allowed under the law.
Vehicles that may generally qualify include:
- Passenger cars
- Sport utility vehicles (SUVs)
- Vans
- Pickup trucks
(as defined by IRS guidance and applicable vehicle weight limits)
Notes
- Only interest paid on the qualified vehicle loan is eligible.
Principal payments do not qualify. - The interest must be actually paid during the tax year to qualify.
- Interest on leases, dealer financing fees, or extended warranties does not qualify.
- Interest on loans for used vehicles does not qualify.
- Interest attributable to business or investment use of a vehicle is not eligible under this provision.
- The deduction applies only to federal income tax.
Vehicle loan interest does not affect sales tax, property tax, or state tax treatment. - This deduction is available for tax years 2025 through 2028, unless extended by future legislation.
How to Report
- Go to the Review tab on the left side of the screen.
- Under the Federal Taxes section, click I’d like to see the forms I’ve filled out or search for a form.
- In the search box, type Additional Deductions – No Tax on Car Loan Interest.
- Alternatively, click the General tab and locate the form there.
- Select Additional Deductions – No Tax on Car Loan Interest to add and open the form.
- Enter the applicable vehicle loan interest information.
- Click Save to apply the deduction.
1040.com will calculate any applicable limitation or phase-out automatically based on the information entered in the return.
Frequently Asked Questions
- Is my car loan completely tax-free?
No. This provision allows a deduction for certain vehicle loan interest for federal income tax purposes only. - Does this apply to used cars?
No. Only interest on loans for new qualified vehicles may be eligible. - Does this apply to leases?
No. Lease payments and lease-related charges do not qualify. - Is there an income limit?
Yes. The deduction begins to phase out at higher income levels and may be reduced or eliminated based on MAGI.
Related Links
This new tax bill was signed into law on July 4, 2025. The One Big Beautiful Bill Act (OBBB or OB3) is now also being referred to by lawmakers as the Working Families Tax Cut Act. You may see one or both names used, but they refer to the same set of tax changes.