New Tax Law Allows Up To $10,000 Annual Deduction On New American-Made Vehicle Loans

President Donald Trump’s new tax-cut law, known as the “Big Beautiful Bill,” introduces a significant change for taxpayers: the ability to deduct interest on vehicle loans for the first time. This tax break is available to individuals who purchase new, American-made vehicles and take out loans starting from this year. However, there are specific qualifications that must be met, including the vehicle being new and assembled in the U.S., and the loan being issued no earlier than this year.

The tax deduction allows taxpayers to claim up to $10,000 of interest payments annually on loans for new American-made vehicles from 2025 through 2028. This applies to a range of vehicles, including cars, motorcycles, SUVs, minivans, vans, and pickup trucks weighing less than 14,000 pounds. Importantly, the deduction is only applicable to vehicles purchased for personal use, not for fleets or commercial purposes. The tax break can be claimed starting on 2025 income tax returns, but it phases out for individuals with incomes between $100,000 and $150,000 or joint taxpayers with incomes between $200,000 and $250,000. Those earning more cannot claim the tax break.

Millions of buyers could benefit from this new tax deduction, but millions of others will not. Last year, 15.9 million new light vehicles were sold in the U.S., with a little over half of these being assembled domestically. Around 60% of retail sales are financed with loans. After excluding fleet and commercial vehicles and customers above the income cutoff, an estimated 3.5 million new vehicle loans could be eligible for the tax break this year, assuming purchasing patterns remain the same.

The tax break applies to vehicles assembled in the U.S., regardless of where the automaker is headquartered. For example, all Tesla vehicles sold in the U.S. are assembled domestically, as are all Acura brands. However, customers must pay attention to specific models. While the Ford Mustang is assembled in Michigan, the Mustang Mach-E is built in Mexico. General Motors assembles all of its Cadillacs in the U.S., but only 44% of its Chevrolets and 14% of its Buicks sold last year were assembled domestically. This is a lower U.S.-assembled rate compared to Honda (60%), Toyota (52%), and Nissan (48%), which are all headquartered in Japan.

Taxpayers could save hundreds of dollars a year with this new deduction. The average new vehicle loan is about $44,000 financed over six years. Interest rates vary by customer, so the savings will too. In general, the tax deduction will decline after the initial year because interest payments on loans are frontloaded while principal payments grow on the back end. At a 9.3% interest rate, an average new vehicle buyer could save about $2,200 on taxes over four years. The tax savings would be less on a loan at 6.5%, which is the rate figured into calculations by the American Financial Services Association, a consumer credit industry trade group.

Some people could also see a reduction in state income taxes. Unlike the tax deduction for home loan interest, which can only be claimed by those itemizing on their tax returns, the deduction for auto loan interest can apply to all taxpayers, including those claiming the standard deduction. On a tax form, the auto loan deduction will come before the calculation of a taxpayer’s adjusted gross income. This is an important distinction because many states use a taxpayer’s federal adjusted gross income as the starting point for figuring their state income taxes. If that income figure is lower, it could reduce the state taxes owed.

The impact of this tax break on vehicle sales remains uncertain. At Bowen Scarff Ford in Kent, Washington, customers started asking about the auto loan tax deduction before Congress had even taken a final vote on the tax-cut bill. The dealer decided to promote it on their website, with a ribbon exclaiming: “CAR LOAN TAX DEDUCTION NOW AVAILABLE.” The general manager, Paul Ray, believes it will help incentivize vehicle purchases through this year. Celia Winslow, president and CEO of the American Financial Services Association, agrees, stating that for some people deciding whether to buy a vehicle or not, this could be a deciding factor.

However, others remain skeptical. According to Smoke’s math, the average annual tax savings is smaller than a single month’s loan payment for a new vehicle. Smoke believes it may not significantly influence someone on the fence about buying a new vehicle but could affect their decision to finance the vehicle instead of paying cash or leasing.