A new deduction for qualified passenger vehicle loan interest became available in 2025. Now, the IRS has released final regulations addressing the deduction, including several important changes from the proposed regulations issued at the end of 2025.

Here’s what taxpayers need to know, particularly those hoping to claim the auto loan interest deduction on their 2026 federal income tax return.

Auto Loan Interest Deduction Basics

The new deduction was created by the One Big Beautiful Bill Act (OBBBA). Taxpayers don’t have to itemize deductions to claim it. The deduction is available both to nonitemizers who claim the standard deduction and to taxpayers who itemize.

The OBBBA defines qualified passenger vehicle loan interest as interest paid or accrued during the tax year on debt incurred by a taxpayer after December 31, 2024, for the purchase of a qualifying vehicle for personal use. The debt must be secured by a “first lien,” meaning the lender generally has priority over other creditors’ claims to the vehicle until the loan is paid off.

Under the OBBBA, a qualifying vehicle must be a:

• Car
• Minivan
• Van
• Sport utility vehicle
• Pickup truck
• Motorcycle

The vehicle must have a gross vehicle weight rating of less than 14,000 pounds. Its original use must begin with the taxpayer, meaning leased and used vehicles don’t qualify.

The deduction is also limited to vehicles assembled in the United States, based on the vehicle’s final assembly location. Not every vehicle sold by an American manufacturer necessarily has its final assembly in the United States. Conversely, some vehicles sold by foreign manufacturers may have their final assembly in the United States.

$10,000 Deduction Limit and Income Phaseouts

The auto loan interest deduction is generally limited to $10,000 per year. However, most taxpayers won’t necessarily qualify for the full $10,000 deduction.

For example, assume you purchase a new vehicle before year-end and finance $50,000 of the price at a 6.5% interest rate for five years. The total interest over that period would be approximately $8,700. Your deduction for each eligible tax year, however, would be limited to the qualifying interest actually paid that year.

The deduction is currently available only through 2028 unless lawmakers extend it.

Your annual deduction could also be reduced based on your income. The deduction begins to phase out when modified adjusted gross income (MAGI) exceeds:

• $100,000 for individual taxpayers
• $200,000 for married couples filing jointly

The otherwise allowable deduction is reduced by $200 for every $1,000, or fraction of $1,000, of MAGI above those thresholds.

Once MAGI reaches $150,000 for individuals or $250,000 for married couples filing jointly, the deduction is no longer available. Depending on the amount of qualifying interest paid, however, the deduction could be fully phased out at a lower MAGI.

It’s also important to remember that a deduction reduces taxable income rather than reducing your tax liability dollar-for-dollar. Your actual tax savings will therefore be only a portion of the amount deducted.

What the Final Auto Loan Interest Deduction Regulations Address

Like the proposed regulations, the final regulations address several issues that affect taxpayers’ eligibility for the deduction and the amount of interest that may qualify.

Qualifying Vehicle Loan Debt

The proposed regulations specified that debt qualified only to the extent it was incurred for the purchase of a qualifying vehicle. Certain other costs directly related to the purchase could also qualify if they were customarily financed as part of the transaction, including vehicle service plans, extended warranties, sales taxes and vehicle-related fees.

In response to comments on the proposed regulations, the final regulations identify additional costs that may be included in a qualifying vehicle loan:

• Guaranteed asset protection coverage
• Credit insurance products
• Repair plans
• Vehicle protection products
• Key fob replacement plans
• Certain vehicle accessories

The final regulations also clarify that whether an item or amount is customarily financed and directly related to the vehicle purchase is determined on an industry-wide basis rather than according to the financing terms of a particular lender.

Interest on credit card debt related to a vehicle purchase generally doesn’t qualify because the debt usually isn’t secured by the vehicle.

Treatment of Negative Equity

Negative equity can occur when a taxpayer trades in a vehicle that has outstanding debt exceeding the vehicle’s value and rolls that excess debt into the financing for a qualifying new vehicle.

The proposed regulations would have excluded this amount from qualifying debt. Although industry commenters requested that the entire loan qualify, the IRS retained the exclusion.

Interest attributable to the negative-equity portion of the loan doesn’t qualify for the deduction under the OBBBA.

The final regulations retain the requirement to allocate interest and principal payments proportionately between qualifying and nonqualifying debt. However, any down payment is applied first against negative equity and other amounts that aren’t incurred for the purchase of the vehicle or directly related to the purchase and customarily financed in the transaction.

Original Use and Personal Use Requirements

The final regulations also address demonstrator vehicles. Some states require dealers to title or register these vehicles, which under the proposed regulations could have resulted in their original use beginning with the dealer rather than the eventual purchaser.

The final regulations provide that the original use of a vehicle held by a dealer won’t begin with the dealer if the vehicle is held primarily for sale to customers. However, original use begins with the purchaser only if the loan documentation treats the vehicle as new.

The final regulations also retain the proposed rules governing personal use.

When the debt is incurred, the taxpayer must expect that the taxpayer, the taxpayer’s spouse or certain relatives will use the vehicle for personal purposes more than 50% of the time during the anticipated ownership period.

If actual use later differs from what was expected when the debt was incurred, it won’t change the personal-use determination.

Before Claiming the Auto Loan Interest Deduction

Taxpayers hoping to take advantage of this temporary deduction, particularly for 2026, should carefully review the requirements. Vehicle eligibility, financing arrangements and documentation can all affect whether interest qualifies.

For example, taxpayers must include the vehicle identification number (VIN) on their federal income tax return for each year they claim the deduction.

This article is intended for general informational purposes only and should not be considered tax, legal, or financial advice. Tax laws and regulations are subject to change, and their application may vary based on individual circumstances. Consult with your tax advisor regarding your specific situation before making tax or financial decisions.