Millions of individuals benefit from a federal tax deduction for the interest they pay on mortgages. Under President Donald Trump’s recently enacted tax-cut legislation, many may now also have the opportunity to claim a tax deduction for the interest on their car loans.
This new deduction will be accessible even to those who do not itemize their deductions. However, there are important conditions that could restrict its application. The vehicles must be brand new, not pre-owned. They need to be manufactured within the United States. Furthermore, the loans must be initiated no earlier than this year, among other requirements.
Here are some things to know about the new auto loan interest tax deduction:
Candidate Trump promised an auto loan interest tax break
During his campaign last year, Trump promised to make interest on car loans tax-deductible. He asserted that this would make owning a car more affordable and would “stimulate massive domestic auto production.”
The idea made it into the big tax-cut bill passed by Congress, which Trump signed into law July 4.
The law allows taxpayers to deduct up to $10,000 of interest payments annually on loans for new American-made vehicles from 2025 through 2028. It applies to cars, motorcycles, sport utility vehicles, minivans, vans and pickup trucks weighing less than 14,000 pounds, a threshold referred to as light vehicles. But it only applies to vehicles purchased for personal use, not for fleets or commercial purposes.
The tax break can be claimed starting on 2025 income tax returns. But the deduction phases out for individuals with incomes between $100,000 and $150,000 or joint taxpayers with incomes between $200,000 and $250,000. Those earning more cannot claim the tax break.
Millions of buyers could benefit, but millions of others will not
U.S. automobile dealers sold 15.9 million new light vehicles last year, a little over half of which were assembled in the U.S, according to Cox Automotive. It says around 60% of retail sales are financed with loans.
After excluding fleet and commercial vehicles and customers above the income cutoff, an estimated 3.5 million new vehicle loans could be eligible for the tax break this year, if purchasing patterns stay the same, said Jonathan Smoke, chief economist at Cox Automotive.
It’s the assembly plant, not the automaker’s headquarters that matters
The tax break applies to vehicles assembled in the U.S., no matter where the company making them is headquartered. All Tesla vehicles sold in the U.S. are assembled in this country. But so are all Acura brands, the luxury model of Japanese automaker Honda.
Last year, 78% of Ford vehicles sold in the U.S. were assembled in this country, according to Cox Automotive. But customers wanting the tax break will need to pay attention to specific models. While the Ford Mustang is assembled in Michigan, the Mustang Mach-E is built in Mexico.
General Motors assembles all of its Cadillacs in the U.S. But just 44% of its Chevrolets sold last year were assembled in the U.S., and just 14% of Buicks, according to Cox Automotive. That’s a lower U.S-assembled rate than Honda (60%), Toyota (52%) and Nissan (48%), which all are headquartered in Japan.
Taxpayers could save hundreds of dollars a year
The average new vehicle loan is about $44,000 financed over six years. Interest rates vary by customer, so the savings will, too. In general, the tax deduction will decline after the initial year, because interest payments on loans are frontloaded while principal payments grow on the back end.
At a 9.3% interest rate, an average new vehicle buyer could save about $2,200 on taxes over four years, Smoke said. The tax savings would be less on a loan at 6.5%, which is the rate figured into calculations by the American Financial Services Association, a consumer credit industry trade group.
Some people also could see a reduction in state income taxes
Whereas the tax deduction for home loan interest can be claimed only by people itemizing on their tax returns, Congress wrote the deduction for auto loan interest so that it can apply to all taxpayers, including those claiming the standard deduction.
On a tax form, the auto loan deduction will come before the calculation of a taxpayer’s adjusted gross income. That’s an important distinction, because many states use a taxpayer’s federal adjusted gross income as the starting point for figuring their state income taxes. If that income figure is lower, it could reduce the state taxes owed.
The verdict is out on whether the tax break will boost sales
At Bowen Scarff Ford in Kent, Washington, customers started asking about the auto loan tax deduction before Congress had even taken a final vote on the tax-cut bill, said General Manager Paul Ray. So he decided to promote it on the dealer’s website.
A website ribbon exclaims: “CAR LOAN TAX DEDUCTION NOW AVAILABLE” while also promoting an electric vehicle tax credit that is ending soon as a result of Trump’s tax-cut law.
“I think it’s going to help incentivize vehicle purchases through this year,” Ray said.
Celia Winslow, president and CEO of the American Financial Services Association, concurred: “For some people deciding — should I buy it, should I not — this could be something that tips the scale.”
Others remain skeptical. According to Smoke’s math, the average annual tax savings is smaller than a single month’s loan payment for a new vehicle.
“I don’t think it moves the needle on somebody on the fence of buying a new vehicle or not,” Smoke said. “But I think it could influence their decision to finance that vehicle instead of paying cash or instead of leasing a vehicle.”
