By David A. Lieb
Millions of people receive a federal tax credit on the interest they pay on their mortgages. Under President Donald Trump’s new tax law, many people were also able to request a tax credit on interest on vehicle loans for the first time.
The new tax deductions can also be used by those who do not itemize the deduction. However, there are some caveats that can limit its reach. The vehicle must be new and unused. They must be assembled in the US, and loans will be issued earlier this year and some qualifications must be listed.
Here’s what you need to know about the new car loan interest tax credit:
Candidate Trump has promised interest tax credit on car loans
Trump promised to earn a tax-deductible profit on car loans during the campaign last year. He said it would make car ownership more affordable and “stimulate large-scale domestic car production.”
The idea was made into a big tax bill passed by Congress, which Trump signed the law on July 4th.
The law allows taxpayers to deduct interest payments of up to $10,000 per year on new American-made vehicles loans between 2025 and 2028. Applies to cars, motorcycles, sports utility vehicles, minivans, vans and pickup trucks under 14,000 pounds. However, it only applies to vehicles purchased for personal use, not for fleet or commercial purposes.
Tax deductions can be claimed from your 2025 income tax return. However, the deduction is a gradual stage for individuals with incomes between $100,000 and $150,000, or joint taxpayers with incomes between $200,000 and $250,000. Those who earn more cannot claim tax cuts.
Millions of buyers can benefit, but millions of others
According to Cox Automotive, US car dealers sold 15.9 million new light vehicles last year. It says that around 60% of retail sales are financed.
An estimated 3.5 million new vehicle loans could be tax-deductible this year after excluding fleets, commercial vehicles and customers on revenue cutoffs, according to COX Automotive chief economist Jonathan Smoke.
What’s important is not the head office of the car manufacturer, but the assembly plant.
The tax cut applies to vehicles assembled in the US. All Tesla vehicles sold in the US are assembled in this country. However, the same applies to the Acura brand, a luxury model of Japanese car manufacturer Honda.
Last year, 78% of Ford vehicles sold in the US were assembled in the country, according to Cox Automotive. However, customers who wish to receive tax deductions should pay attention to certain models. The Ford Mustang is assembled in Michigan, while the Mustang Mach-E is built in Mexico.
According to Cox Automotive, General Motors assembles all Cadillacs in the United States, but only 44% of Chevrolets sold last year are assembled in the United States, while only 14% of Buicks are assembled. This is a lower percentage of the US assembled than Honda (60%), Toyota (52%) and Nissan (48%), and is all headquartered in Japan.
Taxpayers can save hundreds of dollars a year
The average new vehicle loan raises around $44,000 over six years. Interest rates vary from customer to customer, so you can save money as well. Generally, the tax credit decreases after the first year as interest payments on the loan are frontloaded and principal payments increase at the backend.
At a 9.3% interest rate, the average new vehicle buyer can save about $2,200 in taxes over four years, Smoke said. Tax savings are less on a 6.5% loan. This is the tax rate calculated by the American Financial Services Association, a trading group in the consumer credit industry.
Some people also could see the state’s income tax cuts
Tax credits on mortgage interest can only be charged by people who earn the item on their tax returns, but Congress has written car loan interest deductions to make them applicable to all taxpayers, including those who claim the standard deduction.
The tax form will provide a car loan deduction before calculating the adjusted gross income of a taxpayer. That’s an important distinction as many states use taxpayers’ federally adjusted gross income as a starting point for understanding state income taxes. If that income figure is low, it can reduce the outstanding state tax.
There has been a verdict on whether tax credits will drive sales
At Bowen Skulf Ford in Kent, Washington, customers began asking about the car loan tax credit before Congress voted for the tax cut bill, general manager Paul Ray said. So he decided to promote it on the dealer’s website.
The website’s ribbon screams “A car loan tax credit is now available,” while also promoting electric vehicle tax credits that will soon be terminated as a result of Trump’s tax laws.
“I think it will help to encourage vehicles to be purchased through this year,” Ray said.
“For some people, don’t do that if you need to buy it,” said Celia Winslow, president and CEO of the American Financial Services Association.
Others remain skeptical. According to Smoke’s mathematics, the average annual tax savings are smaller than the monthly loan payments for a new vehicle.
“I don’t think anyone will move the needle, whether they buy a new car or not,” Smoke said. “But I think it could affect their decision to fund that vehicle instead of paying cash or leasing it.”
Original issue: July 14th, 2025, 2:56pm EDT
