The One Big Beautiful Bill (OBBB) introduced something that hasn't existed in the US tax code in decades: a deduction for car loan interest. If you financed a US-manufactured vehicle, you may be able to deduct up to $10,000 of interest paid on that loan each year.
Here's how it works, which vehicles qualify, and what the actual dollar savings look like at different income levels.
The Basic Rules
The new provision allows taxpayers to deduct interest paid on an auto loan for a qualifying vehicle, subject to these conditions:
| Rule | Details |
|---|
| Maximum deduction | $10,000 per year |
| Vehicle requirement | Final assembly in the United States |
| Loan type | Purchase loan for a personal-use vehicle |
| How to claim | Schedule 1-A (above-the-line deduction) |
| Itemizing required? | No — this is an above-the-line deduction |
The fact that this is an above-the-line deduction is significant. You claim it on the new Schedule 1-A, and it reduces your adjusted gross income (AGI) directly. You don't need to itemize deductions on Schedule A. Even if you take the standard deduction, you still get this benefit.
What Counts as "US-Manufactured"?
The OBBB uses the same definition as the clean vehicle (EV) credit: a vehicle qualifies if its final assembly occurred in the United States. This doesn't mean every part was made domestically — it means the vehicle was put together on a US assembly line.
This is a broader definition than you might expect. Many vehicles with foreign brand names are assembled in US plants:
Vehicles That Likely Qualify (Assembled in the US)
| Vehicle | Assembly Location |
|---|
| Ford F-150 | Dearborn, MI |
| Chevy Silverado | Fort Wayne, IN / Flint, MI |
| Tesla Model 3 | Fremont, CA |
| Tesla Model Y | Fremont, CA / Austin, TX |
| Toyota Camry | Georgetown, KY |
| Honda Accord | Marysville, OH |
| Hyundai Santa Fe | Montgomery, AL |
| BMW X5 | Spartanburg, SC |
| Volkswagen Atlas | Chattanooga, TN |
| Subaru Outback | Lafayette, IN |
Vehicles That Likely Don't Qualify
| Vehicle | Assembly Location |
|---|
| Toyota Corolla (sedan) | Japan |
| Honda Civic (sedan) | Canada |
| Mazda CX-5 | Japan |
| Hyundai Tucson | South Korea |
| Kia Telluride | South Korea |
| Mercedes C-Class | Germany / South Africa |
How to Check Your Vehicle
Two reliable ways to verify:
- NHTSA VIN decoder — enter your VIN and check the "Plant Country" field
- Manufacturer's label — look for the label on the driver's side door jamb, which lists the final assembly point
Check before you claim the deduction. Assembly locations can change between model years, and some models are assembled in multiple countries depending on the trim level.
The Actual Math: How Much Do You Save?
The deduction is worth your marginal tax rate times the interest paid. Let's run through a realistic scenario.
Example: $50,000 Loan at 6.5% APR, 60-Month Term
In the first year of this loan, you'd pay approximately $3,200 in interest. Here's what the tax savings look like at different income levels:
| Filing Status & Taxable Income | Marginal Rate | Interest Paid | Tax Savings |
|---|
| Single, $45,000 | 12% | $3,200 | $384 |
| Single, $55,000 | 22% | $3,200 | $704 |
| MFJ, $110,000 | 22% | $3,200 | $704 |
| Single, $105,000 | 24% | $3,200 | $768 |
| MFJ, $200,000 | 24% | $3,200 | $768 |
| Single, $195,000 | 32% | $3,200 | $1,024 |
| MFJ, $390,000 | 32% | $3,200 | $1,024 |
Example: $80,000 Loan at 7.0% APR, 72-Month Term
Bigger loan, longer term, higher rate — approximately $5,500 in first-year interest:
| Filing Status & Taxable Income | Marginal Rate | Interest Paid | Tax Savings |
|---|
| Single, $55,000 | 22% | $5,500 | $1,210 |
| MFJ, $110,000 | 22% | $5,500 | $1,210 |
| Single, $105,000 | 24% | $5,500 | $1,320 |
| Single, $195,000 | 32% | $5,500 | $1,760 |
Remember, interest payments decrease over the life of the loan as you pay down principal. By year 3 of a 60-month loan, you might only pay $2,000 in interest, and the deduction shrinks accordingly.
What Doesn't Qualify
Several common situations are not covered by this deduction:
Leases
If you lease a vehicle, your monthly payments include a financing component, but they're structured as lease payments — not loan interest. Leased vehicles do not qualify. Only interest on a purchase loan counts.
Used Vehicle Private-Party Loans
If you buy a used car from a private seller and the loan isn't through a traditional lender that provides proper documentation (a Form 1098-equivalent interest statement), you may not be able to substantiate the deduction. Loans through banks, credit unions, and dealer financing are straightforward. Informal loans between individuals are not.
Business Vehicles
This deduction is for personal-use vehicles only. If the vehicle is used for business, you're already able to deduct vehicle expenses through other provisions (Section 179, depreciation, or the standard mileage rate). You can't double-dip.
Vehicles Assembled Outside the US
No matter how much interest you pay, if the vehicle's final assembly was outside the United States, the deduction doesn't apply.
How to Claim It
-
Get your interest statement. Your lender should provide documentation showing the total interest paid during the tax year — the IRS sets out what lenders must report. Look for a year-end statement or a Form 1098-equivalent.
-
Verify your vehicle qualifies. Use the NHTSA VIN decoder or check the door jamb label for the assembly location.
-
Complete Schedule 1-A. Enter your car loan interest deduction on Line 3. The total from Schedule 1-A flows to Schedule 1, which then flows to Form 1040 Line 10.
-
Keep records. Retain your loan agreement, interest statements, and proof of US assembly for at least three years in case of audit.
Strategic Considerations
Refinancing matters. If you refinance your auto loan, the interest on the new loan still qualifies — as long as the vehicle meets the assembly requirement.
Timing your purchase. If you're buying in late 2026, your first-year interest deduction will be prorated. A vehicle purchased in October gives you about 3 months of interest deductions for that tax year.
The deduction favors higher-rate borrowers. This might sound counterintuitive for a tax break, but someone paying 8% interest deducts more than someone paying 4%. Don't take on a worse loan rate just for the deduction — but if you already have a higher rate, the deduction softens the blow.
Don't let the tax tail wag the dog. A $700 tax savings doesn't justify buying a car you can't afford. The deduction reduces the cost of borrowing, but the loan itself still costs thousands in interest.
This article is for informational purposes only and does not constitute tax advice. Consult a qualified tax professional for guidance specific to your situation.