- Just 1% of all new car loans have annual interest payments of $10,000 or more.
- The tax deduction benefits are reduced for individuals earning over $100,000.
- All new vehicles must be built in the United States to get the benefit.
Car buyers in the US with loans may be able to save thousands of dollars by deducting auto loan interest from their taxable income. The new legislation proudly boasts of offering tax deductions of up to $10,000 on annual interest, but as it turns out, only a fraction of drivers will be able to save that much. Taking into account tariff-induced price hikes, many consumers won’t be better off at all.
The tax break in the Trump administration’s One Big Beautiful Bill Act will run through until the end of 2028. Although it provides a tax deduction of up to $10,000, Cox Automotive notes that it’s “pretty rare” for auto loans to have interest charges of this much, unless they’re for pricey vehicles from premium brands. They account for just about 1% of all new car loans.
Read: This One Line On Your Tax Return Could Soon Save You Thousands On Your Next Car
According to Cox Automotive’s Jonathan Smoke, a loan of approximately $112,000 would be needed to use the full $10,000 deduction. In the US this year, the average car loan has been roughly $43,000. For loans of over $100,000, we’re talking about cars from brands like Mercedes-Benz, Maserati, Aston Martin, Lamborghini, McLaren, Porsche, and others.
These estimates are based on a 72-month loan at an approximately 9.5 percent rate, including a 10 percent down payment, and imply a purchase price of roughly $130,000. In addition to needing a loan for an expensive vehicle to receive the benefits, the income of buyers must fall below a specific threshold.
A Tax Break…Of Sorts
As reported by CNBC, for every $1,000 in income above $100,000 for individuals or $200,000 for joint filers, the value of the deduction drops by $200. And, in all likelihood, individuals or couples earning less than these amounts probably won’t be taking out a loan on a vehicle worth upwards of $130,000. Additionally, there’s no tax benefit at all for individuals earning over $150,000 or couples earning more than $250,000.
In addition, eligible vehicles must be new and built in the United States, drastically narrowing the scope of models that can benefit from this.
Smoke believes the average buyer will get a tax deduction of roughly $3,000 in the first year of a six-year loan and a $2,000 deduction in each of the subsequent years. In most cases, this will reduce consumers’ tax bill by $500 or less in the first year.
