To claim the new auto loan interest deduction on your 2025 tax return, you’ll need to file Form 1040 with Schedule 1-A (Additional Deductions), Part IV — “No Tax on Car Loan Interest” — and include the VIN of your qualifying vehicle. The deduction is above-the-line, meaning you can claim it whether you take the standard deduction or itemize. The maximum deduction is $10,000 per tax year, available for tax years 2025 through 2028 under the One Big Beautiful Bill Act.
For 2025 returns (filed in spring 2026), lenders weren’t yet required to send borrowers a Form 1098-VLI, so you’ll calculate the deduction from your lender’s existing interest statements. Starting with the 2026 tax year, the IRS has confirmed that lenders are required to issue Form 1098-VLI to borrowers who paid $600 or more in qualifying interest, making the claim process more straightforward. This is general information — for your specific tax situation, consult a qualified tax professional.
Step-by-Step Process for the 2025 Tax Year
Step 1: Confirm your vehicle qualifies.
The vehicle must be:
- New (no used vehicles)
- Have undergone final assembly in the United States
- Under 14,000 lbs GVWR
- Purchased and financed after December 31, 2024
Verify final assembly through the NHTSA VIN Decoder before assuming eligibility.
Step 2: Calculate total qualifying interest paid in 2025.
Pull together your lender statements (monthly or annual) showing interest paid during the calendar year. For 2025 returns, an annual statement, monthly statements, or even a borrower-accessible online portal showing total interest qualifies as documentation.
Step 3: Confirm your income falls within eligibility.
Income phaseouts apply:
| Filing Status | Phaseout Begins | Fully Phased Out |
|---|---|---|
| Single | $100,000 MAGI | $150,000 MAGI |
| Married Filing Jointly | $200,000 MAGI | $250,000 MAGI |
If your income is in the phaseout range, you’ll claim a reduced deduction. Above the upper threshold, you can’t claim the deduction at all.
Step 4: Apply the phaseout calculation if needed.
Within the phaseout range, the deduction reduces proportionally. The IRS provides a worksheet in the Schedule 1-A instructions to calculate the exact allowable amount.
Step 5: Complete Schedule 1-A, Part IV.
Fill in:
- The VIN of the qualifying vehicle
- Total qualified vehicle loan interest paid
- Any phaseout adjustment
- Final allowable deduction
Step 6: Transfer to Form 1040.
The Schedule 1-A total flows to your Form 1040 as an above-the-line adjustment, reducing your Adjusted Gross Income.
What Records to Keep
Hold these documents for at least three years after filing (the standard IRS audit window):
- Original loan documents showing loan origination date
- Documentation of the vehicle VIN
- Lender statements showing interest paid in the tax year
- Vehicle purchase agreement showing it was new (not used)
- Any phaseout calculation worksheets
If your loan was refinanced during the year, keep documentation showing both the original and refinanced loan.
Common Mistakes to Avoid
Claiming interest on a used vehicle. Used vehicles don’t qualify under any circumstances.
Claiming interest on a non-US-assembled vehicle. Even a brand-new luxury vehicle doesn’t qualify if its final assembly was outside the United States. Always verify the VIN.
Forgetting the phaseout calculation. Taxpayers in the phaseout range who claim the full deduction risk an IRS adjustment notice.
Including lease payments. Leases don’t generate qualifying interest under this provision.
Claiming interest on loans originated before 2025. Only loans originated after December 31, 2024 qualify.
What Changes for 2026 and Later
Starting with the 2026 tax year, your lender must send you a Form 1098-VLI (Vehicle Loan Interest Statement) by January 31 each year if you paid $600 or more in qualifying interest during the prior year. The form will show total qualified interest paid, simplifying the calculation.
For 2025 returns specifically, lenders had transition relief — they could use existing statements, annual statements, or borrower portals to document interest paid.
Tax Software vs. Manual Filing
Major tax preparation software (TurboTax, H&R Block, FreeTaxUSA) added support for the new deduction in their 2025 tax-year products. The software handles the phaseout calculation automatically.
If you’re filing manually, the Schedule 1-A instructions include the phaseout worksheet.
How Much It Saves
The deduction is above-the-line, so it directly reduces your taxable income. Your savings equal your marginal tax rate times the deduction amount.
| Interest Paid | 22% Bracket | 32% Bracket |
|---|---|---|
| $2,000 | $440 | $640 |
| $4,000 | $880 | $1,280 |
| $6,000 | $1,320 | $1,920 |
| $10,000 (max) | $2,200 | $3,200 |
State tax may add additional savings depending on whether your state conforms to federal rules.
Bottom Line
Claiming the auto loan interest deduction on your 2025 return takes Schedule 1-A, your lender’s interest statement, and a few minutes of verification. Most filers will save several hundred to a few thousand dollars in federal tax. The process gets easier starting with the 2026 tax year when Form 1098-VLI becomes standard. Until then, keep clean records and use tax software that handles the phaseout automatically if your income is in the affected range.
