The One Big Beautiful Bill Act added an auto loan interest deduction that millions of car buyers can claim starting with their 2025 taxes. But here is the part that catches people off guard - your income determines whether you get the full deduction, a reduced amount, or nothing at all.
This is where MAGI comes in. Modified adjusted gross income is the number the IRS uses to decide how much of your auto loan interest you can deduct. Get it right, and you save money. Miss the income rules, and you could claim a deduction you do not actually qualify for.
Here is how the MAGI auto loan deduction works in plain English, and how to find out if you still qualify.
What Is MAGI and Why Does It Control Your Deduction?
MAGI stands for modified adjusted gross income. The IRS uses it as a measuring stick for dozens of tax benefits, and the auto loan interest deduction is now one of them.
Your MAGI starts with your adjusted gross income (AGI) from your tax return - that is your total income after deductions like student loan interest, retirement contributions, and self-employment expenses. From there, the IRS adds back certain deductions to get to your MAGI.
For most people, MAGI and AGI are very close or identical. But if you claim deductions for things like IRA contributions, rental property losses, or foreign income exclusions, your MAGI could be higher than your AGI.
The IRS created income thresholds for the MAGI auto loan deduction because the law was designed to target middle-income drivers, not high earners. Congress set the phase-out ranges to limit the tax benefit as income rises.
Tax disclaimer: This article provides educational information about the auto loan interest deduction. It is not tax advice. Consult a licensed tax professional for guidance specific to your situation.
The MAGI Income Thresholds for the Auto Loan Deduction
The deduction follows a phase-out structure based on your filing status. Here is how the income limits break down:
Single filers and married filing separately:
- Full deduction available if MAGI is $100,000 or below
- Partial deduction if MAGI falls between $100,001 and $150,000
- No deduction if MAGI exceeds $150,000
Married filing jointly:
- Full deduction available if MAGI is $200,000 or below
- Partial deduction if MAGI falls between $200,001 and $250,000
- No deduction if MAGI exceeds $250,000
Head of household:
- Full deduction available if MAGI is $150,000 or below
- Partial deduction if MAGI falls between $150,001 and $200,000
- No deduction if MAGI exceeds $200,000
According to the IRS.gov, these thresholds apply to the 2025 tax year and currently run through 2028 under the law as written.
How the Phase-Out Works When You Are in the Middle Range
If your MAGI lands inside the phase-out range, you do not lose the entire deduction. You lose a percentage of it based on how far into the range you sit.
The math works like this. Take your MAGI, subtract the lower threshold for your filing status, then divide that number by the width of the phase-out range. That gives you the percentage of the deduction that gets eliminated.
Example for a single filer:
Say your MAGI is $125,000. The phase-out range runs from $100,000 to $150,000 - a $50,000 window.
Your excess income above the threshold is $25,000.
Divide $25,000 by $50,000 and you get 50%. That means you lose 50% of your eligible deduction.
If you paid $3,000 in auto loan interest during the year, you can only deduct $1,500.
Example for a married couple filing jointly:
MAGI is $225,000. The phase-out runs from $200,000 to $250,000 - a $50,000 window.
Excess income is $25,000. That is 50% of the $50,000 window, so 50% of the deduction gets eliminated.
On $4,000 in interest paid, the couple can deduct $2,000.
The key point - being in the phase-out range does not mean you walk away empty. It means you get a reduced benefit. Running the numbers before assuming you do not qualify is worth the five minutes it takes.
How to Calculate Your MAGI for This Deduction
You likely will not find MAGI listed as a single line on your tax return. You have to calculate it. Here is how:
Step 1 - Find your AGI. This is Line 11 on Form 1040. If you have not filed yet, estimate it by adding all income sources and subtracting the above-the-line deductions you plan to claim.
Step 2 - Identify your add-backs. The IRS adds certain amounts back to your AGI to reach MAGI. Common add-backs include:
- IRA deductions
- Student loan interest deduction
- Tuition and fees deductions
- Rental property passive losses
- Foreign income exclusion
- Self-employed health insurance deduction
Step 3 - Add those amounts back to your AGI. The result is your MAGI for purposes of the auto loan deduction.
For most W-2 employees without complex tax situations, MAGI equals AGI. If you work a standard job, have no rental properties, and do not take IRA deductions, you can simply use Line 11 of your 1040 and move on.
If your tax picture is more complex - self-employed income, multiple income streams, real estate investments - the add-back calculation matters more. A tax professional or tax software will run this automatically when you enter your information.
What Counts as Interest Under This Deduction
Even if your MAGI qualifies, only certain interest payments count toward the deduction. The rules focus on new personal vehicle purchases, not all car debt.
To qualify, the interest must be paid on a loan used to purchase a vehicle that:
- Is a new automobile (not used)
- Was assembled in the United States (final assembly requirement)
- Has a final purchase price at or below the IRS cap for the vehicle class
- Is used for personal transportation, not commercial or business purposes
- Was purchased during tax years 2025 through 2028
The interest on a lease does not qualify. Neither does interest on a used vehicle purchase.
You will receive Form 1098-VLI from your lender showing the qualifying interest you paid during the year. This form is the documentation you need to support the deduction on your return.
For vehicle qualification details - including how to verify final assembly location using a VIN check, the NHTSA vehicle identification tool provides confirmation based on your vehicle's VIN.
What Happens If You Did Not Know About the Income Limit
Some borrowers claim the full deduction without realizing the MAGI rules reduce or eliminate their benefit. The IRS receives Form 1098-VLI data from lenders, so the agency has visibility into who paid qualifying interest. That does not automatically trigger a review, but an overstated deduction creates exposure if your return is examined.
The safer path is calculating your MAGI before filing. If you fall inside the phase-out range, claim only the reduced amount. If you exceed the upper threshold, skip the deduction entirely.
If you already filed and claimed more than you were entitled to, an amended return using Form 1040-X corrects the record. The IRS generally allows amendments within three years of the original filing deadline.
Three Quick Questions to Know Where You Stand
Before you spend time on the full MAGI calculation, these three questions help you gauge your situation quickly:
Question 1 - Did you buy a new car between 2025 and 2028 with a loan? If no, the deduction does not apply regardless of income.
Question 2 - Is your income clearly below the lower threshold for your filing status? Single under $100,000, married filing jointly under $200,000, head of household under $150,000 - if yes, you likely qualify for the full deduction and can move to verifying vehicle eligibility.
Question 3 - Is your income clearly above the upper threshold? Single over $150,000, married filing jointly over $250,000, head of household over $200,000 - if yes, the deduction does not apply to you regardless of interest paid.
If you land in the middle - inside the phase-out range - the calculation above gives you the reduced deduction amount you can claim.
The Bottom Line on MAGI and the Auto Loan Deduction
The MAGI auto loan deduction creates a real tax benefit for middle-income car buyers. The income rules are not complicated once you understand the structure. A single threshold below which you get everything, a range above which you get a reduced amount, and an upper limit where the benefit disappears.
Pull your most recent tax return, check Line 11, add back any qualifying deductions, and compare the result to your filing status threshold. That one calculation tells you whether the auto loan interest you paid is working for you at tax time.
If your MAGI puts you in the game - even partially - gather your Form 1098-VLI from your lender and confirm your vehicle meets the assembly and purchase price requirements. The deduction is available through 2028, so understanding these rules now positions you to claim it correctly every year it applies.
This article is for educational purposes only and does not constitute tax advice. Tax laws are subject to change. Consult a licensed tax professional before making decisions based on your individual tax situation.
