Many individuals benefit from a federal tax credit for the interest on their mortgage payments. With the introduction of President Donald Trump’s tax law, a new option has emerged: tax credits on vehicle loan interest.
This tax deduction isn’t just for people who itemize. Still, there are some restrictions. The vehicle needs to be new, unused, and assembled in the United States, and the loans must have been issued this year. Additionally, certain qualifications apply.
Here’s what you should know about the new car loan interest tax credit:
Trump’s Promise on Car Loan Interest Tax Credits
During his campaign, Trump promised a tax-deductible benefit on car loans, claiming it would make car ownership more affordable and boost domestic production.
This idea was transformed into a significant tax bill that Congress approved, and Trump signed it into law on July 4th.
The law permits taxpayers to deduct up to $10,000 yearly in interest payments on loans for new cars made in America from 2025 to 2028. This applies to various vehicle types—cars, motorcycles, SUVs, minivans, vans, and pickup trucks—provided they weigh under 14,000 pounds. It’s essential to note that this deduction applies for personal use only, not for commercial purposes.
Tax deductions can be claimed starting with your 2025 tax return, though the benefits phase out for individuals earning between $100,000 and $150,000 and joint filers making between $200,000 and $250,000. Anyone above those thresholds won’t qualify.
A Potential Benefit for Millions
Cox Automotive reports that last year, U.S. dealers sold 15.9 million new light vehicles, with about 60% financed through retail sales.
This year, an estimated 3.5 million new vehicle loans could qualify for the tax deduction, once factoring out fleet and commercial vehicles and those above income limits, according to Jonathan Smoke, chief economist at Cox Automotive.
The Assembly Location Matters
It’s worth noting that the tax benefit applies to vehicles assembled in the U.S. For example, all Tesla vehicles sold in the country are assembled domestically. Similarly, Acura, a luxury brand from Japan’s Honda, fits the criteria.
Cox Automotive found that last year, 78% of Ford vehicles sold were made in the U.S. Still, buyers should verify the specifics of certain models; for instance, the Ford Mustang is assembled in Michigan, while the Mustang Mach-E is made in Mexico.
General Motors assembles all Cadillacs in the U.S., yet only 44% of sold Chevrolets and 14% of Buicks were produced domestically, trailing behind Honda (60%), Toyota (52%), and Nissan (48%), all headquartered in Japan.
Potential Savings for Taxpayers
The average new vehicle loan hovers around $44,000 over six years, with varying interest rates that can lead to significant savings. Generally, the tax credit tends to drop after the first year since interest payments typically decline over time.
With a 9.3% interest rate, new car buyers might save roughly $2,200 in taxes over four years, as per Smoke’s analysis. Conversely, savings are lower with a 6.5% loan, based on calculations from the American Financial Services Association.
State Tax Cuts May Also Apply
Unlike mortgage interest credits, which are limited to itemized deductions, the car loan interest deductions are designed for all taxpayers, including those taking the standard deduction.
The tax form will factor in the car loan deduction before determining a taxpayer’s adjusted gross income, vital since several states base their tax systems on this figure, potentially lowering state tax obligations.
The Impact on Vehicle Sales Remains to Be Seen
At Bowen Skulf Ford in Kent, Washington, customers began inquiring about the tax credit ahead of Congress’s vote on the tax cut. General manager Paul Ray decided to promote this credit on the dealership’s website.
The site boldly announces, “A car loan tax credit is now available,” alongside advertisements for soon-to-expire electric vehicle tax credits due to Trump’s legislation.
“I think it will encourage purchases this year,” Ray remarked.
On the flip side, Celia Winslow, president and CEO of the American Financial Services Association, suggested caution: “For some people, it would be better not to buy unless necessary.”
Others, including Smoke, express skepticism. He indicates that the typical annual savings are often smaller than the average monthly loan payment for a new vehicle. “I don’t think it will significantly sway buyers,” he stated, adding that it might influence financing decisions over outright purchases.
