• Tax deduction signed in July applies to new US-assembled vehicles purchased 2025-2028
• Single filers earning up to $100,000 and joint filers up to $200,000 qualify for full deduction
• Trump’s 25% tariffs on vehicles expected to add $2,000-$4,000 to prices, offsetting tax savings

WASHINGTON (TDR) — President Donald Trump’s new tax deduction for auto loan interest, signed into law in July as part of the One Big Beautiful Bill Act, promises savings for car buyers purchasing US-assembled vehicles, though experts question whether the benefit will meaningfully improve affordability as Trump’s tariffs push vehicle prices higher.

The temporary measure allows individuals earning up to $100,000 annually—or $200,000 for joint filers—to deduct up to $10,000 in interest paid on qualifying auto loans for tax years 2025 through 2028. The deduction applies only to new vehicles with final assembly in the United States and does not cover leases or used cars.

How the Tax Deduction Works

The provision fulfills a campaign promise Trump made at a North Carolina rally in October 2024, when he pledged to “make interest on car loans fully tax deductible” to improve affordability. Unlike the mortgage interest deduction, taxpayers can claim the auto loan benefit even if they take the standard deduction rather than itemizing.

“Thanks to President Trump, we are finally ensuring every car sold in America is made in America and that working Americans can actually afford to buy a car in the first place,” Senator Bernie Moreno (R-OH) said when introducing companion legislation.

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For a typical buyer financing a $47,640 vehicle at 6.6% interest over 60 months, the deduction would cover approximately $3,100 in first-year interest payments. Since auto loans frontload interest, the benefit is largest in the initial year of ownership, according to the Bipartisan Policy Center.

Limited Eligibility Narrows Impact

The deduction phases out at a 20% rate for taxpayers earning above the income thresholds, with the benefit completely eliminated for single filers making over $150,000 and married couples earning above $250,000. The Congressional Budget Office estimates the provision will cost $31 billion through 2034, making it one of the top 25% most expensive provisions in the legislation.

Only vehicles with final assembly in the United States qualify, a requirement that excludes many popular imports. Analysis of the 25 most popular new cars sold in the US shows the domestic assembly requirement significantly limits which models are eligible, potentially excluding popular models from Honda, Hyundai, Nissan and Toyota.

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Economist Jonathan Smoke at Cox Automotive told CNBC that most taxpayers won’t reach the maximum $10,000 deduction benefit, since only the most expensive cars have annual interest charges approaching that level.

Tariffs Undercut Affordability Goals

While the tax deduction aims to improve affordability, Trump’s 25% tariffs on imported vehicles and auto parts are expected to increase prices by $2,000 to $4,000 per vehicle over the next six to twelve months, according to Goldman Sachs analysis. The tariffs, which took effect in April, apply to any vehicle not assembled in the US—accounting for 46% of roughly 16 million vehicles sold domestically last year.

Boston Consulting Group estimates tariffs will add $110 billion to $160 billion in annual costs to the industry, impacting 20% of US new-vehicle market revenues. Consultants at AlixPartners project tariffs will ultimately add nearly $2,000 per vehicle and reduce total US car sales by approximately 1 million over three years.

“We expect to see declining discounting and then accelerated price increases as the tariffs are passed through and supply tightens,” Cox Automotive Chief Economist Charlie Chesborough said.

Entry-Level Vehicles Most Affected

Cars priced under $30,000 have seen inventory growth of just 3.9% year-over-year during the first half of 2025, according to Cars.com. Five years ago, vehicles under $30,000 made up nearly 40% of the market; they now represent just 13.6% of inventories.

With 92% of entry-level vehicles built outside the US, tariffs disproportionately affect affordable options that budget-conscious buyers need most. Only the Honda Civic and Toyota Corolla are produced domestically for under $30,000.

The Internal Revenue Service has provided transitional relief for tax year 2025 for lenders who must file information returns showing total interest received on qualified passenger vehicle loans. Taxpayers must submit their vehicle’s VIN number to the IRS when claiming the deduction.

Will the tax savings from Trump’s auto loan deduction be enough to offset the price increases caused by his tariffs?

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