Car Loan Interest Deduction Calculator 2026

Enter your auto loan balance — the current outstanding amount on your vehicle loan. If you recently purchased the car, this is your original loan amount. If you have been making payments, enter the remaining balance.

Enter your annual interest rate (APR) as shown on your loan agreement. The national average for new car loans is approximately 6.5-7.5% in 2026, while used car loans average 8-11%. Higher rates mean more deductible interest.

Enter the total loan term in months (e.g., 60 for a 5-year loan) and the months remaining on your loan. The calculator uses these to determine your current amortization position and estimate how much interest you will pay in the current tax year. Early loan years have higher interest portions.

Enter your annual gross income to determine your federal tax bracket and whether the MAGI phase-out applies. The phase-out begins at $100,000 for single filers and $200,000 for married filing jointly. Income above these thresholds reduces the $10,000 deduction cap dollar-for-dollar.

Select your filing status and optionally enter your state income tax rate. The federal deduction does not affect state taxes, but this helps you understand the full picture of your auto loan costs.

The Car Loan Interest Deduction Calculator estimates your federal income tax savings under the One Big Beautiful Bill Act (OBBBA) auto loan interest deduction, which took effect for the 2026 tax year. This new provision allows taxpayers to deduct up to $10,000 per year in interest paid on auto loans for vehicles that were final-assembled in the United States.

The deduction was designed to incentivize Americans to buy domestically manufactured vehicles by reducing the effective cost of financing. According to the IRS, approximately 85 million Americans currently have auto loans, and roughly 60% of vehicles sold in the US are assembled domestically. For qualifying borrowers, the deduction can reduce annual federal taxes by $200 to $2,200 depending on the loan amount, interest rate, and tax bracket.

For example, a single filer earning $65,000 with a $35,000 auto loan at 7% APR pays approximately $2,300 in interest during the first year. In the 22% federal tax bracket, that translates to $506 in annual tax savings — or about $42 per month in additional take-home pay. Over a 3-year period before the provision sunsets, total savings could reach $1,300 or more.

The deduction is above-the-line, meaning you do not need to itemize to claim it. It applies to both new and used vehicles, as long as the vehicle was assembled in the US (verified by VIN). Income phase-outs apply starting at $100,000 MAGI for single filers and $200,000 for married filing jointly. The provision expires after the 2028 tax year unless extended by Congress.

The car loan interest deduction savings are calculated as follows:

Step 1: Calculate annual interest paid

Monthly Payment = P × [r(1+r)ⁿ] / [(1+r)ⁿ − 1]

Where P = loan balance, r = monthly rate (APR/12), n = total months. The calculator amortizes the loan to your current position and sums the interest portion for the next 12 months.

Step 2: Apply the $10,000 deduction cap

Capped Interest = min(Annual Interest Paid, $10,000)

Step 3: Apply MAGI phase-out

Phase-Out Reduction = min($10,000, max(0, MAGI − Threshold))

Where Threshold = $100,000 (single) or $200,000 (MFJ).

Adjusted Cap = max(0, $10,000 − Phase-Out Reduction)

Deductible Interest = min(Annual Interest, Adjusted Cap)

Step 4: Federal tax savings

Federal Savings = Deductible Interest × Marginal Tax Rate

Step 5: Effective loan rate

Effective Rate = (Annual Interest − Federal Savings) / Loan Balance × 100

The following table summarizes the deduction limits and phase-out thresholds:

Example 1 — New Truck Buyer (Single): A single filer earning $65,000 buys a new Ford F-150 assembled in Dearborn, Michigan for $45,000 with $10,000 down. The $35,000 loan at 7.0% APR over 60 months has a monthly payment of $693. In the first year, approximately $2,300 goes to interest. At the 22% bracket, the deduction saves $506 per year ($42/month). The effective loan rate drops from 7.0% to approximately 5.5%. Since income is well below the $100,000 phase-out, the full deduction applies.

Example 2 — Used Car Buyer (Married Filing Jointly): A married couple earning $90,000 combined buys a used 2023 Toyota Camry assembled in Georgetown, Kentucky for $28,000. The $22,000 loan at 8.5% APR over 48 months generates approximately $1,700 in first-year interest. Filing jointly in the 12% bracket, the deduction saves $204 per year ($17/month). While the savings are modest, they reduce the effective interest rate from 8.5% to about 7.5%.

Example 3 — Luxury Vehicle with Phase-Out (Single): A single filer earning $107,000 finances a $55,000 BMW X5 assembled in Spartanburg, South Carolina. The $50,000 loan at 6.5% APR over 72 months generates $3,050 in first-year interest. However, income exceeds the $100,000 threshold by $7,000, reducing the cap from $10,000 to $3,000. Deductible interest is limited to $3,000. At the 24% bracket: $3,000 × 24% = $720 savings. Without the phase-out, savings would have been $732 — in this case the phase-out barely affects the result because actual interest is close to the reduced cap.

Example 4 — High Loan Amount (Single): A single filer earning $80,000 finances a $70,000 vehicle at 8.0% APR over 72 months. First-year interest is approximately $5,350. The full amount is deductible (under the $10,000 cap and below the income threshold). At the 22% bracket: $5,350 × 22% = $1,177 per year ($98/month). The effective rate drops from 8.0% to about 6.3%. Over 3 years before the sunset, estimated total savings exceed $3,000.