The One Big Beautiful Bill Act (OBBBA), signed on July 4, 2025, lets individuals deduct up to $10,000 a year of interest on a loan for a new personal-use vehicle for tax years 2025 through 2028. Before this, interest on a personal car loan was nondeductible personal interest.
The deduction is narrow. The vehicle must be new and assembled in the United States, the loan must be taken out after 2024, and the income phase-out is steep. Final regulations (T.D. 10054) published in September 2026 also settled how leases, used cars, and refinancing are treated.
This article is for Japanese residents and expatriates in the U.S. who are thinking about buying a car or refinancing before year-end. It explains which vehicles and loans qualify, the cap and phase-out, and the VIN and lender statements you will need.
Key points
- The deduction covers interest on a loan taken out after December 31, 2024 to buy a new vehicle for personal use (you are the original user). The loan must be secured by a first lien on the vehicle.
- The vehicle must be a car, minivan, van, SUV, pickup truck, or motorcycle with a gross vehicle weight rating (GVWR) under 14,000 pounds, and its final assembly must have occurred in the United States. The brand’s home country does not matter.
- The cap is $10,000 per return per year regardless of filing status. It is reduced by $200 for each $1,000 (or part of $1,000) of MAGI above $100,000 ($200,000 for joint filers).
- Lease payments, used vehicles, and rolled-in negative equity from a trade-in do not qualify, and buying out a leased vehicle generally does not either.
- You must include the vehicle identification number (VIN) on your return. Nonresident aliens generally cannot claim it.
Which vehicles qualify
| Requirement | Details |
|---|---|
| Vehicle type | Car, minivan, van, SUV, pickup truck, or motorcycle |
| Weight | Gross vehicle weight rating under 14,000 pounds |
| New vehicle | Original use must begin with you; used vehicles do not qualify |
| Assembly | Final assembly in the United States |
| Purpose | When you take out the loan, you expect personal use by you, your spouse, certain relatives, or household members more than 50% of the time |
“Personal use” means any use other than in a trade or business or for the production of income. According to the Form 1040 instructions, driving for your job as an employee does not count as business use. Personal use also includes use by your spouse; your or your spouse’s child, grandchild, father, mother, brother, or sister; and a member of your household who shares your main home. For example, if you expect to drive for a rideshare service 15% of the time and use the vehicle personally 85% of the time, you are treated as buying it for personal use.
Checking “final assembly in the United States”
Under the final regulations, you can rely on the plant of manufacture shown in the VIN or the final assembly point on the label affixed to the vehicle. The IRS suggests checking the vehicle information label at the dealer or looking up the plant of manufacture with the National Highway Traffic Safety Administration’s VIN Decoder.
What counts is where the vehicle was assembled, not the brand. A Japanese-brand vehicle assembled at a U.S. plant can qualify, while an American-brand vehicle assembled abroad cannot. Do not go by the model name or brand alone; check each vehicle’s VIN or label before you buy.
Which loans qualify
| Situation | Qualifies? |
|---|---|
| Loan you took out as the borrower after 2024 to buy a new vehicle, secured by a first lien on it | Yes |
| Refinancing of such a loan, secured by a first lien on the same vehicle | Yes, up to the balance refinanced (extra cash taken out does not qualify) |
| Sales tax, vehicle-related fees, extended warranty, or service plan financed with the purchase | Can qualify as items customarily financed and directly related to the purchase |
| Liability insurance or a trailer financed in the same loan | No |
| Negative equity from a trade-in rolled into the new loan | No |
| Lease payments | No |
| Buying the vehicle during or at the end of a lease | Generally no (original use usually begins with the lessor) |
| Loan to buy a used vehicle | No |
| Loan taken out on or before December 31, 2024 | No |
| Unsecured personal loan or credit card purchase | No (a first lien on the vehicle is required) |
| Loan in the name of a corporation or LLC | No (only individuals, decedents’ estates, and non-grantor trusts can deduct it) |
If you also use the vehicle for business, the first question is whether you expected personal use above 50% when you took out the loan. Part IV of Schedule 1-A has columns, by VIN, for interest deducted as a business expense on Schedule C, E, or F and for interest deducted on Schedule 1-A. You cannot deduct the same interest twice.
Cap and income phase-out
| Filing status | Cap | Phase-out starts at MAGI of | A $10,000 deduction is fully phased out at MAGI of |
|---|---|---|---|
| Single, head of household, married filing separately, etc. | $10,000 | $100,000 | $150,000 |
| Married filing jointly | $10,000 | $200,000 | $250,000 |
To figure the reduction, divide the amount by which MAGI exceeds the threshold by $1,000, round any fraction up to the next whole number, and multiply by $200. (The tips and overtime deductions drop the fraction instead.) The cap applies per return, so if you have several qualifying loans you add up the interest first and then apply the $10,000 limit.
MAGI is AGI plus amounts excluded under section 911 (the foreign earned income exclusion) and certain territory exclusions. Unlike the tips and overtime deductions, the IRS summary does not list a joint-return requirement for this deduction. It is available whether you itemize or take the standard deduction.
Claiming it: the VIN and Form 1098-VLI
You figure the deduction in Part IV of Schedule 1-A (Form 1040) and enter the VIN of each qualifying vehicle.
| Tax year 2025 | Tax year 2026 and later | |
|---|---|---|
| Lender reporting | Under transition relief (Notice 2025-57), lenders could provide total interest through an online portal, monthly statements, or an annual statement | Lenders that receive $600 or more of interest file and furnish Form 1098-VLI, Vehicle Loan Interest Statement |
| What to check | Total interest paid, the VIN, and the loan date | Interest on Form 1098-VLI and the vehicle’s year, make, model, and VIN |
A Form 1098-VLI does not by itself mean you qualify. You still need to confirm the vehicle’s final assembly location, personal use, and the other rules yourself.
Points for Japanese residents and expatriates
- Resident or nonresident: IRS Publication 519 states that nonresident aliens generally are not eligible for this deduction. F-1 or J-1 students and trainees who file Form 1040-NR as nonresident aliens generally cannot use it. Expatriates who are resident aliens for tax purposes are treated like U.S. citizens.
- Lease or buy: Lease payments do not qualify, and buying out a leased vehicle generally does not either. The deduction applies only when you finance the purchase of a new vehicle.
- Company vehicles: A loan where the company is the borrower, or a vehicle in the company’s name, does not give you an individual deduction.
- Assembly, not brand: Check where your specific vehicle was assembled rather than relying on the brand.
- Moving back to Japan: Only interest paid for tax years 2025–2028 counts. Your resident or nonresident status in the year you leave can change the answer, so check early.
Worked examples
Example: All figures below are hypothetical.
Example 1: Single filer below the phase-out
In February 2026 you buy a new U.S.-assembled SUV with a $40,000 loan. You pay $2,600 of interest in 2026, and your MAGI is $90,000. MAGI is under $100,000, so there is no reduction and the deduction is $2,600. Assuming a 22% marginal rate, federal income tax would be about $572 lower.
Example 2: Joint filers in the phase-out (rounding up)
Interest paid in 2026 is $4,000 and MAGI is $215,500.
- Excess: $215,500 − $200,000 = $15,500
- $15,500 ÷ $1,000 = 15.5 → rounded up to 16
- Reduction: 16 × $200 = $3,200
- Deduction: $4,000 − $3,200 = $800
Example 3: Single filer with higher income
Interest is $3,000 and MAGI is $116,000. The excess of $16,000 ÷ $1,000 = 16, so the reduction is 16 × $200 = $3,200. That is more than the $3,000 of interest, so the deduction is $0.
FAQ
I bought my leased car at the end of the lease. Does the interest qualify?
Generally no. The preamble to the final regulations explains that original use of a leased vehicle commonly begins with the lessor, so a lessee who buys the vehicle during or at the end of the lease is not its original user.
Does a leftover prior-model-year new car bought at year-end qualify?
It can. The final regulations confirm that original use commences with the purchaser even if the vehicle was manufactured in a prior year and not sold until a later year (for example, a 2025 model year vehicle sold in 2026). The vehicle must still meet the other rules, including U.S. final assembly.
I refinanced in 2026 a loan I took out in 2024. Does it qualify?
The final regulations treat a refinancing of a qualifying loan as qualifying, up to the balance refinanced, if the new loan is secured by a first lien on the same vehicle. A loan taken out on or before December 31, 2024 never qualified, so refinancing it in 2026 should not make it eligible.
Are Japanese-brand cars excluded?
No. Eligibility depends on where final assembly occurred, not the brand. A vehicle assembled at a U.S. plant can qualify even if the brand is Japanese. Check the VIN Decoder or the vehicle label.
Can I claim it if I file married filing separately?
The IRS summary does not list a joint-return requirement for this deduction. The cap is $10,000 per return regardless of filing status, and the phase-out threshold for everyone other than joint filers is $100,000 of MAGI.
Does it affect my state income tax?
This is a federal income tax deduction. State treatment varies, so check your state’s rules.
At CLT NY INC., an IRS Enrolled Agent can review whether your car loan qualifies, along with the other new OBBBA deductions, and prepare your return, in English or Japanese. Contact us.
Related articles
- The OBBBA (2025 Tax Law) Explained: What Changed for Japanese Residents of the U.S. (Standard Deduction, SALT, Tips and Overtime, CTC, Trump Accounts)
- Mastering Gig Economy Taxes: Schedule C Expenses & Car Deduction Strategies for Uber/DoorDash Drivers
- The Truth About the ‘183-Day Rule’: A Comprehensive Guide to the U.S. Substantial Presence Test for Tax Residency
- Expat’s Essential Guide: Navigating Dual-Status Tax Filing for US Arrival & Departure Years
- Standard Deduction vs. Itemized Deductions: Which is Better and How to Choose for U.S. Tax Filers
Sources: IRS: Tax deductions for working Americans and seniors; IRS Topic No. 505, Interest expense; IRS IR-2025-129; IRS IR-2025-105 (Notice 2025-57); Internal Revenue Bulletin 2026-39 (T.D. 10054); Federal Register: Car Loan Interest Deduction (Sept. 8, 2026); IRS Schedule 1-A (Form 1040); IRS 2025 Instructions for Form 1040 (Schedule 1-A); IRS Instructions for Form 1040-NR; IRS Publication 519; NHTSA VIN Decoder. Information as of October 2026. This article provides general information and is not individual tax advice.
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