A major provision in President Donald Trump’s new tax-cut law allows many Americans to deduct interest paid on auto loans for the first time. Unlike the longstanding mortgage interest deduction, this new benefit applies to taxpayers who do not itemize, meaning it is more broadly available. However, the tax break comes with specific conditions.
Only new vehicles assembled in the U.S. qualify, and the loans must originate in 2025 or later. The deduction is available only for personal-use vehicles—not commercial fleets—and covers cars, SUVs, motorcycles, vans, and pickup trucks under 14,000 pounds.
Trump’s Tax Break Targets Middle-Class Buyers of U.S.-Assembled New Vehicles Only
The auto loan deduction fulfills a promise Trump made during his presidential campaign, where he emphasized making car ownership more affordable and stimulating domestic vehicle production. The law, passed by Congress and signed on July 4, allows taxpayers to deduct up to $10,000 annually in interest from new vehicle loans from 2025 through 2028.
Trump’s Auto Loan Tax Deduction Offers Modest Relief for Buyers of U.S.-Assembled VehiclesThe deduction phases out for individuals earning between $100,000 and $150,000 and for joint filers between $200,000 and $250,000, with no benefit for those above the upper limits. This targets the break toward middle-income taxpayers.
A key qualification is that the vehicle must be assembled in the United States, regardless of the automaker’s headquarters. For example, all Tesla vehicles sold in the U.S. qualify because they are assembled domestically. Similarly, many models from foreign-owned automakers like Honda and Toyota qualify if they are built in American plants.
Conversely, some American-branded vehicles do not qualify. Ford’s Mustang qualifies, but the Mustang Mach-E, assembled in Mexico, does not. General Motors has mixed results: all Cadillacs are U.S.-built, but only a fraction of Chevrolets and Buicks meet the criteria. Buyers will need to confirm specific model eligibility based on assembly location, not brand identity.
Modest Tax Savings May Influence Financing Choices More Than Drive New Purchases
The average vehicle loan in the U.S. is around $44,000 and typically spans six years. With average interest rates around 9.3%, a taxpayer could save approximately $2,200 in taxes over four years. Since auto loan interest is front-loaded, most of the deduction benefit occurs early in the loan term.
Notably, this deduction reduces a taxpayer’s adjusted gross income (AGI), which can also lower state income tax liability in states that base their calculations on federal AGI. Unlike the home mortgage interest deduction, this benefit applies to both itemizers and those taking the standard deduction, making it more widely accessible.
Reactions to the new tax break are mixed. Some dealers report early customer interest and have started promoting the deduction, expecting it to encourage purchases. Industry leaders believe it may help convince undecided buyers.
However, experts like Cox Automotive economist Jonathan Smoke believe the savings may be too modest to significantly boost new vehicle sales. Instead, the deduction may influence financing decisions—prompting buyers to choose loans over leases or cash purchases—rather than acting as a primary motivator for a new vehicle purchase.
