Millions of car buyers in the U.S. can look forward to some tax relief thanks to a recently enacted law known informally as the “Big and Beautiful Bill.” Signed by President Trump on July 4th, it aims to ease the financial burden of car ownership for many working families.
This initiative was first proposed by Trump during his campaign—a promise made back in October to make car ownership significantly more affordable. Now, it seems that promise is becoming a reality with new tax credits set to take effect for vehicle purchases starting in 2025. However, it’s worth noting that the tax deduction won’t apply to everyone—especially those buying used cars or leasing vehicles.
Still, if you buy a new vehicle this year or within the next four years, you could be eligible for a tax credit when filing your returns for 2025. Keep in mind, this deduction will expire in 2028, meaning the window to benefit from it is relatively short.
On another note, this legislation also ends federal tax credits for electric vehicles after September 30th. Previously, buyers could receive a tax credit of $7,500 for new EVs and $4,000 for used ones, which played a role in making electric vehicles more accessible.
Here’s what to consider:
What’s the deduction for new car loans?
The New Tax Reductions and Expenditure Act allows car buyers to deduct up to $10,000 in interest on eligible loans for passenger vehicles in the taxable year following their purchase, starting with 2025. This is akin to the mortgage interest deductions homeowners enjoy, but there’s an important difference: car loan interest can be itemized even if you opt for the standard deduction. In contrast, mortgage interest is only deductible if you itemize your deductions.
Which vehicles qualify for this deduction?
The tax relief applies to new cars, motorcycles, SUVs, minivans, and vans weighing under 14,000 pounds, but unfortunately, used cars won’t qualify. Additionally, to be eligible for the deduction, the vehicle needs to be assembled in the U.S. It’s also important to note that this applies only to personal use purchases—not fleet or commercial use—and excludes leased vehicles, which account for about 25% of all car sales in the country.
Are there income limits for the car loan deduction?
A single taxpayer with a modified adjusted gross income (MAGI) under $100,000 will receive the full benefit of the deduction. The MAGI is essentially your adjusted gross income, easily found in your tax return. For those exceeding the income thresholds, the deduction will diminish by $200 for every extra $1,000 earned. It phases out completely for single filers making over $150,000 and couples over $250,000.
How many Americans will benefit?
According to Cox Automotive, if consumer purchasing habits remain consistent and considering the exclusions for commercial vehicles and income limits, about 3.5 million new vehicle loans could potentially qualify for these deductions. Notably, last year, around 60% of the 15.9 million new light vehicles sold were financed through loans.
What kind of tax savings can car buyers expect?
The savings depend on the size of your vehicle loan and whether you meet the income limits for the tax credits. Generally, a typical car buyer may save hundreds of dollars on their taxes annually. The average new car loan hovers around $44,000 over six years. Interest rates differ widely, impacting potential savings as well. Typically, the tax credit tends to decrease after the first year, as initial payments are largely interest-based, with principal payments rising subsequently.
A buyer with a qualifying car loan at an interest rate of about 6.5% could potentially deduct around $3,000 in the first year and around $1,800 in subsequent years. According to the American Financial Services Association, this deduction lowers taxable income and, consequently, tax liability. So, for instance, someone in a 22% tax bracket could save around $660 by claiming a $3,000 deduction.
In cases where someone has a subprime credit score and faces a typical interest rate of 9.3%, they could save around $2,200 in taxes over a four-year span.
