A borrower who financed $35,000 at 7.5 percent over five years for a new pickup truck assembled in Fort Worth, Texas, paid roughly $2,500 in interest during 2025. Under a provision that most car buyers have never heard of, that interest is now tax-deductible, and the savings show up whether or not the filer itemizes.
The deduction comes from Section 70203 of the One Big Beautiful Bill Act (H.R. 1), signed into law as part of the 119th Congress’s reconciliation package. It allows qualifying borrowers to write off up to $10,000 per year in auto-loan interest for tax years 2025 through 2028, but only if the vehicle underwent final assembly inside the United States. Because it is an above-the-line deduction, it reduces adjusted gross income directly, which means filers do not need to itemize on Schedule A to benefit.
Starting in January 2026, lenders must send borrowers a brand-new IRS form, the 1098-VLI, reporting eligible interest paid during the prior tax year. The statutory authority for that form sits in a new information-return provision, IRC Section 6050AA. No draft of the form has appeared on the IRS website yet, but the legal mandate is already in place. For millions of auto borrowers, that single slip of paper will be the key document when they file next spring.
Who qualifies and how the deduction works
The eligibility rules are narrow enough that buyers need to check every box before counting on the write-off. A borrower must meet all four conditions:
- The auto loan was originated after December 31, 2024.
- The loan is secured by a first lien on the vehicle. Second liens, home-equity loans used to buy a car, and unsecured personal loans do not count.
- The vehicle is a passenger car or light truck used primarily for personal, non-business purposes.
- The vehicle underwent final assembly in the United States.
That last requirement is the one most likely to surprise people. A Chevrolet Equinox assembled in Ramos Arizpe, Mexico, would not qualify, even though it carries a Detroit brand name. A Toyota Camry built at the Georgetown, Kentucky, plant would. Buyers can verify assembly location by entering the 17-character VIN at the National Highway Traffic Safety Administration’s VIN decoder. The statute requires filers to include the VIN on their tax return so the IRS can cross-check the assembly location.
The $10,000 cap applies per tax return, not per vehicle. Most borrowers will land well below it. According to Edmunds, the average new-vehicle loan in early 2025 carried a balance near $40,000 at an interest rate around 7.1 percent over roughly 68 months. On a loan like that, first-year interest runs in the neighborhood of $2,700. At a 22 percent marginal federal tax rate, that translates to about $594 in real tax savings, not life-changing money, but not trivial either, especially stacked on top of other deductions.
Because the write-off is above the line, it does more than just cut the tax bill. A lower AGI can preserve or unlock eligibility for other benefits that phase out at certain income levels, including education credits, the child tax credit, and IRA contribution deductions. Think of it as a cousin of the mortgage-interest deduction, except it lives on the front page of the return rather than on Schedule A.
What the law does not yet spell out
Congress wrote an income phase-down into the statute, meaning higher earners will see the deduction shrink and eventually disappear. But as of May 2026, neither the IRS nor the Treasury Department has published the specific AGI thresholds or the rate at which the benefit phases out. Until proposed regulations or a revenue procedure fills that gap, upper-income borrowers cannot calculate their exact savings.
Several other practical questions remain unanswered:
- Leases: The statute refers to “qualified purchase indebtedness,” which strongly suggests lease payments do not qualify. A lease is structured as a use agreement, not a purchase loan. The IRS has not issued explicit guidance confirming this reading, but tax practitioners widely expect leases to be excluded.
- Refinances: If a borrower refinances a loan originally taken out after December 31, 2024, it is unclear whether the replacement loan retains eligibility. The statute ties the deduction to the original purchase transaction, and refinance proceeds that exceed the remaining balance could complicate the picture further.
- Used vehicles: The law requires the vehicle to have undergone final assembly in the U.S. and to be financed with a qualifying first-lien loan, but it does not explicitly limit the deduction to new cars. Whether a used, U.S.-assembled vehicle purchased with a post-2024 loan qualifies has not been addressed in any IRS guidance released so far. This is a significant open question given that used-car sales outnumber new-car sales by roughly two to one.
- Retroactive application: Because the deduction covers tax years 2025 through 2028, borrowers who financed a qualifying vehicle in January or February 2025, months before the bill was signed, appear to be eligible. The statute does not distinguish between loans originated before or after enactment, only that they were originated after December 31, 2024.
Lender readiness is the wild card
Banks, credit unions, and the captive finance arms of automakers (GM Financial, Toyota Motor Credit, Ford Motor Credit, and others) are all required to file Form 1098-VLI with the IRS and furnish copies to borrowers by January 31, 2026. Large servicers already handle similar reporting for mortgage interest on Form 1098, so the concept is familiar. But auto-loan platforms have never been required to pair vehicle identification numbers with interest totals for tax-reporting purposes, and that system integration is not a small lift.
No sample 1098-VLI has appeared on the IRS website, and no public implementation timeline for lender system changes has been released. The statutory mandate under IRC 6050AA is clear, but whether smaller credit unions and independent finance companies can retool their platforms in time is genuinely uncertain. Borrowers whose lenders miss the January 31 deadline or issue forms with errors may need to fall back on their own monthly loan statements and amortization schedules to document the deduction. Keeping clean records from day one is not optional here.
How this interacts with the clean-vehicle credit
Buyers of electric or plug-in hybrid vehicles may wonder whether they can stack this interest deduction with the existing clean-vehicle credit under Section 30D of the Internal Revenue Code. Nothing in the OBBB’s text prohibits claiming both on the same vehicle, provided each benefit’s separate requirements are met independently.
The catch is that the two provisions use different geographic tests. The Section 30D clean-vehicle credit requires final assembly in North America, which includes Canada and Mexico. The new interest deduction requires final assembly specifically in the United States. So a qualifying EV built at a U.S. plant could, in principle, generate both a credit worth up to $7,500 and a separate interest deduction worth up to $10,000 in write-offs per year. The IRS has not explicitly addressed the interaction, but the plain text of both statutes does not create a conflict. Buyers eyeing this combination should confirm that their specific vehicle satisfies both assembly tests before assuming they can double up.
What borrowers should do before filing season
For anyone who financed a vehicle in 2025, or who plans to before December 31, a few steps are worth taking now rather than scrambling next April:
- Verify the assembly location before you sign. Run the VIN through the NHTSA VIN decoder before closing on the loan. If the vehicle was assembled outside the U.S., the deduction is off the table regardless of the brand on the hood.
- Keep every loan document. Hold on to the purchase agreement, the retail installment contract, and monthly statements showing interest breakdowns. If your lender is slow to issue Form 1098-VLI or gets the numbers wrong, these records become your proof.
- Watch for IRS guidance on income thresholds. The phase-down details will determine whether households above certain income levels benefit at all. The IRS typically publishes proposed regulations or revenue procedures well before filing season opens in late January.
- Do not confuse this with the clean-vehicle credit. The two benefits have different eligibility rules, different dollar amounts, and different mechanics. One is a credit that directly offsets tax owed; the other is a deduction that lowers taxable income. Qualifying for one does not guarantee qualifying for the other.
Where the deduction stands as of May 2026
The core structure of the benefit is settled law, codified in 26 U.S. Code Section 163 and backed by the full text of the OBBB. The gaps that remain, income thresholds, lease treatment, used-vehicle eligibility, are implementation details, not existential questions about whether the benefit exists. For the typical buyer who financed a U.S.-assembled car or truck this year, the deduction is one of the more straightforward new tax breaks to emerge from the reconciliation package. And when that 1098-VLI arrives in the mailbox next January, claiming it should be no more complicated than reporting mortgage interest has been for decades.
