Senate Republicans don’t have too many, but their tax bill does give a deduction on interest paid on auto loans. This proposed legislation only extends that benefit to loans for the purchase of new passenger cars. Of particular interest to state-level leaders, the plan focuses financial relief directly at drivers. It allows them to write off up to $10,000 of interest from their taxable income annually, but it intentionally excludes loans on used cars.
The tax deduction will only apply to loans secured after December 31, 2024, making it a future benefit for new car buyers. The measure is a small, but extremely important, provision of the wider, unprecedented multitrillion-dollar tax reform package that the Senate Finance Committee has just released. Matt Gardner, a senior fellow with the Institute on Taxation and Economic Policy explains that this is “pretty clear” language in the bill. Second, he clarifies that only purchase of new cars will be deductible.
A major shift in that direction came in the recent version of the bill, according to Tax Foundation Chief Economist William McBride. It now further removes loans on used cars, a significant move from previous drafts. This may be one of the most consequential decisions ever made for millions of drivers. Indeed, over 20 million such households are projected to purchase used cars by 2025. In 2023, the median household income for new vehicle purchasers soared to $115,000. By comparison, used car purchasers had an average income of $96,000, demonstrating a chasm in equity related to access to tax benefits.
The typical new car driver will pay over $1,332 in annual loan interest in 2024. The wealthiest among us would disproportionately benefit from this tax perk. Gardner explained, “The more you earn, the higher the tax rate you pay, meaning the more benefit you get from this thing.”
A cloud hangs over the new tax break, as outside forces threaten to undo much of its promise. The Trump administration’s illegal 25% tariffs on all imported cars and parts will raise prices for new vehicles by thousands on average. As one source pointed out, “Tariffs will completely eat up the value of this deduction for a lot of people.” That possibility of significant erosion of the deduction’s value begs the question of just how good an offer this really is for the average consumer.
The deduction allowed is phased out by $200 for every $1,000 of income above specified thresholds. As a result, this tax relief may not be equitably benefitting lower and middle-income earners. Higher-income people would almost certainly realize far less value. This is of equal or greater concern to equity that tax benefits are not distributed equitably within the state.
In fact, during his campaign last year, President Trump proposed making auto loan interest tax-deductible. He further underscored that his administration is serious about alleviating the economic pressures on American consumers. The new proposed tax break would be available for solar from 2025 to 2028. This change is a game changer for consumers because it flips how federal tax law traditionally treated auto loan interest on its head.