Car Loan Tax Cuts

Tax Breaks on Car Loans: A Possible Return

Imagine this: the U.S. House of Representatives has given their nod to President Trump’s ambitious tax proposal, affectionately dubbed the “Big Beautiful Bill.” What’s catching everyone’s eye is a part of the bill that proposes an auto loan interest deduction. U.S. taxpayers, whether claiming standard or itemized deductions, could potentially subtract up to $10,000 in auto loan interest from their taxable income. But hold on, it’s not all open doors. Eligibility is influenced by income brackets and the type of vehicle purchased.

Now, here’s how it breaks down. For single filers, the deduction begins to phase out at incomes exceeding $100,000, disappearing entirely once reaching over $149,000. For joint filers, this figure doubles, starting the phase-out at $200,000, ultimately vanishing for incomes above $249,000. Those who qualify could benefit from this deduction for auto loans secured between 2025 and 2028, as detailed by the Tax Foundation. Just remember, the vehicle must be assembled within the United States and can include everything from SUVs to motorcycles.

Interest Rates

Let’s talk numbers. Should this bill become law, it would likely be most beneficial during the initial year of an auto loan, when interest-heavy payments are common. Currently, for those with top-tier FICO scores (781-850), the average interest rate on a new car loan sits at about 4.77%. Drop a notch to the 661-780 range and rates climb to 6.40%. It keeps going up: 9.59% for 601 to 660 scores, 13.08% for 501 to 600, and a striking 15.75% for scores between 300 and 500. Theoretically, if one paid $2,000 in auto loan interest, the deduction could shave $400 off their tax bill. However, leases, commercial vehicles, and salvage titles won’t qualify for this tax break.

There’s a bit of a catch, too. New proposals would impose an extra $100 annual registration fee on hybrids, while owners of electric vehicles would see a $250 yearly charge, aimed at bolstering the Highway Trust Fund by an estimated $40 billion over the next ten years.

Conclusion

The return of auto loan interest deductions since the Reagan years could bring some financial relief, but its broader impact seems to be underwhelming. Cox Automotive’s Jonathan Smoke skeptically comments via Bankrate that many wouldn’t rush to buy a new car solely for a $400 tax cut. Factor in rising vehicle prices, partly due to Trump’s auto tariffs, and those savings might quickly evaporate. While the deduction sounds promising, it’s a good reminder that in life, and especially car buying, there’s more beneath the surface than meets the eye.