Yes. Eligible taxpayers may deduct up to $10,000 per year of qualified interest on certain loans used to purchase a new personal-use vehicle for tax years 2025 through 2028. The car loan interest deduction 2026, created under the One Big Beautiful Bill Act (OBBBA), has specific loan, vehicle, income, and U.S. final-assembly requirements. The IRS refers to this benefit as the deduction for qualified passenger vehicle loan interest, or QPVLI.
A Note on Current Guidance: The IRS issued proposed regulations for this deduction in December 2025. These rules are not yet final, so some details could still change before the IRS issues final guidance. Taxpayers should confirm current requirements before filing.
For self-employed taxpayers, there is another important distinction: this is a personal deduction. Interest connected to business use of the same vehicle may follow separate business tax rules.
Who Qualifies for the New Car Loan Interest Deduction?
Generally, the interest must be on a loan that:
- Originated after December 31, 2024
- Was used to purchase an eligible new vehicle
- Is first lien so the lender has the primary security interest in the vehicle
- Relates to a vehicle the original use of which begins with the taxpayer
- Meets the personal-use and U.S. final-assembly requirements
Used vehicles do not qualify because the taxpayer must be the vehicle’s original user. Lease payments also do not qualify. See IRS Topic No. 505 — Interest Expense for the federal eligibility rules.
Which Vehicles Qualify for the Car Loan Interest Deduction?
A qualifying passenger vehicle can generally be a car, SUV, minivan, van, pickup truck, or motorcycle. It must have a gross vehicle weight rating below 14,000 pounds, undergo final assembly in the United States, and satisfy the other loan and personal-use requirements.
You may look at the vehicle information label or use its VIN. The NHTSA VIN Decoder shows the manufacturing plant and country as reported by the manufacturer, which is more reliable than keeping a model-by-model list that may become out of date.
How Much Car Loan Interest Can You Deduct?
The maximum deduction is $10,000 per tax return each year. However, the deduction applies only to qualified interest, not the vehicle’s purchase price, loan principal, or full monthly payment.
Monthly car payment = principal + interest
Only the qualifying interest portion enters the deduction calculation.
What Is the Income Limit for the Car Loan Interest Deduction?
The deduction starts to phase out when modified adjusted gross income (MAGI) is above $100,000, or $200,000 for married couples filing jointly. MAGI is the income measure the law uses to determine this phaseout.
The deduction is reduced by $200 for every $1,000 (or part thereof) of income in excess of the applicable threshold.
Simple Phaseout Example
A single taxpayer has $10,000 of qualified interest and MAGI of $110,000. The taxpayer is $10,000 above the threshold, so the deduction falls by $2,000.
Potential deduction is $8,000. This is a simplified illustration of the phaseout calculation.
When Does the Deduction Disappear Completely? The deduction phases out entirely once MAGI reaches $150,000 for single filers or $250,000 for married couples filing jointly. Above those levels, no car loan interest deduction is available, regardless of how much qualifying interest was paid.
Do You Have to Itemize to Deduct Car Loan Interest?
No. Qualifying taxpayers may claim the deduction whether they itemize or take the standard deduction. The IRS currently reports qualified passenger vehicle loan interest as a “below-the-line” deduction, meaning it is reported on Form 1040 and reduces taxable income regardless of whether you claim the standard deduction or itemize.
What If You Use the Car for Both Personal and Business Purpose?
This is where the rules become more relevant for 1099 contractors. The new deduction applies to qualifying personal-use interest, while interest allocable to business use may potentially receive separate business tax treatment.
Personal vs. Business Interest
For a mixed-use vehicle, the business portion of loan interest may potentially be treated as a business expense. Meanwhile, qualifying interest tied to personal use may fall under the new deduction.
However, the same dollar of interest cannot be deducted twice. IRS Publication 334 specifically addresses this personal-versus-business allocation for self-employed taxpayers.
For more detail, review business vehicle deductions for 1099 contractors.
Why Mileage and Bookkeeping Still Matter
Maintain records of business mileage, total mileage, loan interest, vehicle ownership, reimbursements, and the business-use percentage. These records support the division of vehicle expenses between business and personal use.
This becomes especially useful for contractors traveling between assignments or work locations. Our guide to locum tenens tax planning covers related planning considerations.
What Does Not Qualify?
Generally, the new deduction does not cover:
- Used vehicle purchases
- Lease payments
- Vehicles that fail the passenger-vehicle requirements
- Vehicles without qualifying U.S. final assembly
- Loans originated before January 1, 2025
- Loans without the required lien
- Principal payments
- Interest above the allowable deduction
- Interest already deducted elsewhere
- Loans used to finance fleet sales
- Vehicles with a salvage title or intended for scrap or parts
- Loans from certain related parties
A vehicle does not automatically fail simply because a 1099 contractor also uses it for business. Mixed-use vehicles require careful allocation.
What Records Should You Keep?
Keep the lender interest statement, vehicle purchase documents, loan origination date, VIN, final assembly support, and records of interest paid.
For mixed-use vehicles, also retain mileage logs, business-use calculations, and reimbursement records. Your income records should also support MAGI if the phaseout applies.
Get Help Separating Personal and Business Vehicle Deductions
This new QPVLI deduction may provide an additional personal deduction for qualifying vehicle interest. However, self-employed taxpayers need to keep it separate from business mileage, vehicle expenses, and reimbursement treatment.
1099 Accountant helps CRNAs, locum tenens providers, and other 1099 professionals review vehicle expenses, maintain cleaner records, and coordinate personal and business deductions within their broader tax plan.
Explore tax advisory for 1099 professionals or contact us at (855) 529 1099 for tax-planning consultation with 1099 Accountant today.
