How will the new tax deductions on auto loans work?

If you are planning to take out an auto loan to purchase a car, you now may get a tax break thanks to President Trump's recently passed tax cut law. One of the many provisions introduced under the wide-ranging One Big Beautiful Bill Act is a tax deduction on auto loan interest.

However, eligibility for this tax break is contingent upon meeting narrow criteria — only new cars assembled in the U.S. qualify for the credit. And while the deduction will be up to $10,000, it likely "won't do much to help car buyers facing price hikes from tariffs" that Trump is imposing, said NerdWallet.

How does the car loan interest deduction work?

The new auto loan interest tax deduction "temporarily lets car buyers write off up to $10,000 a year in interest paid on qualifying auto loans," said Kiplinger. Unlike many tax breaks, which require filers to itemize their tax returns, this deduction is "'above-the-line,' meaning it will apply to people who claim the standard deduction and those who itemize," said NerdWallet.

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The tax break will start in 2025 for eligible car purchases (more on those below) and run through 2028.

Who can get the new deduction for auto loans?

Claiming the auto loan interest deduction requires meeting certain criteria, both for the vehicle purchased and the buyer's income. Specifically, the vehicle must be:

New. Only new vehicle purchases qualify. Used cars are not eligible.

For personal use. "The vehicle must be for your personal (i.e., non-business, non-commercial) use," though it can "include cars, motorcycles, minivans, vans, sport utility vehicles and pickup trucks," said CNN Business, citing David Mellem, an enrolled agent who runs Ashwaubenon Tax Professionals in Wisconsin.

Assembled in the U.S. The vehicle will only qualify if its final assembly happens in the U.S., which "some industry manufacturers say would exclude many popular imports," including "models from Honda, Hyundai, Nissan and Toyota," said Kiplinger.

Additionally, the full deduction is only available for single filers with an adjusted gross income up to $100,000 ($200,000 for joint filers). "The deduction amount decreases $200 for every $1,000 over that income threshold," said Fast Company, citing CNN.

How much is the auto loan interest deduction worth?

Given that auto loan interest rates "vary by customer," that means "the savings will, too," said The Associated Press.

But experts do not expect many buyers to get the maximum $10,000 deduction. To claim that, a person would "need to get an auto loan of more than $110,000," said NerdWallet, citing Cox Automotive Chief Economist Jonathan Smoke. However, "only about 1% of all auto loans are of that size," with the average new vehicle transaction price around $49,000. Instead, said Cox to the outlet, the "typical new loan really would only see around $500 benefit."