New Tax Credit for Vehicle Loans Under Trump’s Tax Law

Millions of Americans currently benefit from a federal tax credit for mortgage interest payments. Additionally, a new tax law introduced by President Donald Trump allows people to claim a tax credit on interest from vehicle loans for the first time.

This new tax deduction is available even for those who don’t itemize their deductions. However, there are specifics to keep in mind: the vehicle must be brand new, assembled in the U.S., and loans must have been issued in 2025. Certain qualifications apply.

Overview of the Car Loan Interest Tax Credit

Trump had promised during his campaign to provide a tax-deductible benefit for car loans, arguing it would make owning a car more affordable and boost domestic car manufacturing.

This idea was transformed into significant legislation that Congress approved, and Trump signed into law on July 4th.

The legislation allows taxpayers to deduct interest payments of up to $10,000 annually on loans for new American-made vehicles purchased between 2025 and 2028. This applies to various types of vehicles, including cars, motorcycles, SUVs, minivans, vans, and pick-up trucks, provided they weigh less than 14,000 pounds. However, it’s important to note that the deduction is only valid for personal use and not for commercial or fleet vehicles.

These deductions can be claimed on income tax returns for the year 2025. However, there is a gradual phase-out for individuals making between $100,000 and $150,000, and for couples with incomes between $200,000 and $250,000. Those earning above these thresholds will not qualify for the deductions.

Potential Beneficiaries of the Tax Credit

Based on data from Cox Automotive, U.S. car dealers sold approximately 15.9 million new light vehicles last year, with around 60% of retail sales financed.

It’s estimated that 3.5 million new vehicle loans could be eligible for tax deductions this year, after eliminating fleet and commercial vehicles and considering income cutoffs, according to Jonathan Smoke, Chief Economist at Cox Automotive.

It’s crucial that vehicles are assembled in the U.S. to qualify for the tax cut. For instance, all Tesla vehicles sold in the U.S. are assembled domestically, as are luxury Acura models made by Honda.

According to Cox Automotive, about 78% of Ford vehicles sold in the U.S. were assembled locally. However, buyers should be cautious since some models may not qualify. For example, the Ford Mustang is made in Michigan, but the Mustang Mach-E is produced in Mexico.

General Motors assembles all Cadillac models in the U.S. However, only 44% of Chevrolets and 14% of Buicks sold last year were assembled domestically. In comparison, Honda saw 60%, Toyota 52%, and Nissan 48% of their vehicles assembled in the U.S.

Tax Savings Potential

The average new vehicle loan amounts to around $44,000 over six years, with interest rates varying. Thus, tax savings can differ significantly. Generally, the tax credit will decrease after the first year since the initial payments are mostly interest, with principal payments increasing later.

Smoke noted that for a vehicle with a 9.3% interest rate, the typical new car buyer could save about $2,200 in taxes over four years. Conversely, savings are typically lower for loans at 6.5% interest, according to the American Financial Services Association.

Interestingly, some individuals may also experience state income tax reductions. Typically, only those who itemize can claim mortgage interest tax credits, but car loan interest deductions are available to all taxpayers, even those taking the standard deduction.

The deduction for car loan interest will be factored in before calculating a taxpayer’s adjusted gross income. This can be significant, as many states base their income tax assessments on federally adjusted gross income. A lower income figure can lead to reduced state taxes.

Debate on Sales Impact

There’s been some discussion about whether these tax credits will truly drive vehicle sales. At Bowen Skulf Ford in Kent, Washington, customers started inquiring about the tax credit before Congress even voted on the bill, prompting General Manager Paul Ray to advertise it on their website.

The website notably promotes the availability of the car loan tax credit, along with electric vehicle tax credits that are set to expire due to Trump’s new tax laws.

“I think it will definitely encourage more vehicle purchases this year,” Ray stated.

However, some experts remain skeptical. Smoke pointed out that the average tax savings are often lower than monthly loan payments for a new vehicle.

“I really don’t think it’ll change anyone’s decision to buy a new car,” he commented. “But it might influence whether they decide to finance, rather than lease or pay in cash.”