The deduction is worth your tax rate times the qualifying interest you paid, up to $10,000 of interest. Because interest is front-loaded in a car loan, the first full years give the biggest deduction.
How much interest does a new-car loan generate?
A $38,000 loan at 6.9% for 72 months, with the first payment in February 2026, has a payment of about $646 and generates about $2,266 of interest in 2026 (11 payments).
| Buyer (2026) | Income (MAGI) | Interest paid | Deduction | Federal tax saved |
|---|---|---|---|---|
| Single | $65,000 | $3,100 | $3,100 | $372 |
| Married filing jointly | $150,000 | $4,800 | $4,800 | $1,056 |
| Single, in the phase-out | $112,500 | $5,000 | $2,400 | $528 |
The phase-out rounds against you
For car loan interest, the deduction drops $200 for each $1,000 or fraction of $1,000 over $100,000 ($200,000 joint). At $112,500, that's 13 steps (12.5 rounded up), so $2,600 comes off: $5,000 − $2,600 = $2,400. For tips and overtime, the phase-out rounds down instead.
Before you count on it
- The vehicle must be new, mainly for personal use, and assembled in the U.S. See which cars qualify.
- Look for Form 1098-VLI from your lender.
- Most states don't follow this deduction.
Estimate yours, including first-year interest from your loan terms, with the car loan interest calculator.
Common questions
How much can I save with the car loan interest deduction?
Your tax rate times the qualifying interest, up to $10,000 of interest. For most buyers that's a few hundred to about $1,000 a year.
Is the deduction bigger in the first years of the loan?
Yes. Car loans charge the most interest early, so the deduction shrinks as the balance falls.
Sources
See how Taxlumo calculates and our editorial policy.