Last year, data show Americans drove away from dealerships with more than 15 million new vehicles, with roughly 80% of buyers reportedly relying on financing to purchase.
So far in 2025, average car prices are about $48,000, according to Kelley Blue Book, with interest rates for car loans hovering around an average of 8.64%.
For a 5-year loan, that roughly translates to $187 a month just in interest. For those who need a new car, those costs can strain budgets.
Now, a new tax break could ease that burden by allowing borrowers to deduct auto loan interest from their taxes. In Trump’s new so-called "One Big, Beautiful bill," the GOP offers a tax deduction for car loan interest.
But while the plan sounds like it would provide savings, it’s important to note that not every car or buyer will qualify for the tax benefit.
So, if you’re thinking about buying a new car, here’s what you need to know.
‘Big, beautiful bill’ car loan interest deduction
Trump and the GOP's new tax megabill, known by some as the One Big Beautiful Bill (OBBB), became law on July 4.
That $3.4 trillion legislation primarily extends or makes permanent tax breaks from Trump’s 2017 Tax Cuts and Jobs Act (TCJA). But it also offers some new tax breaks, one of which involves vehicles.
Here’s how the auto loan interest tax deduction will work:
- The measure temporarily lets car buyers write off up to $10,000 a year in interest paid on qualifying auto loans
- The tax break will start with purchases made in 2025 and run through 2028.
- You won't have to itemize to claim the deduction.
But not every buyer or vehicle will qualify.
- To qualify, the car must be new, for personal use, and meet a "final assembly" in the United States requirement — a rule some industry manufacturers say could exclude many popular imports. (Think popular models from Honda, Hyundai, Nissan, and Toyota.) More on that below.
- Cars, minivans, vans, SUVs, pickup trucks, or motorcycles, weighing less than 14,000 pounds qualify, according to the IRS. ATVs, trailers, campers, used cars, and vehicles assembled abroad are not eligible.
- The deduction is limited to $10,000 per year and phases out for individuals earning more than $100,000 or couples making over $200,000. So, higher-income households will see less benefit.
- The deduction applies to new cars with loans originating after December 31, 2024, and only if the vehicle has final assembly in the U.S.
Remember: These changes apply to loans taken out in 2025 and after, but just for three years, through 2028.
The IRS also notes: "If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction."
What is U.S. 'final assembly'?
Update: The IRS recently issued a fact sheet stating that the place of final assembly for purposes of the car loan interest deduction is the location listed on the vehicle's information label.
How can you find that information?
- The IRS says that every new vehicle at the dealership should have an information label that lists the final assembly location.
- You can also look up the Vehicle Identification Number (VIN).
- The National Highway Traffic Safety Administration VIN decoder tool could also be useful in indicating where your car was assembled.
Who benefits from the auto loan interest deduction?
Supporters of the deduction argue it will provide direct financial relief to car buyers at a time when both vehicle prices and interest rates remain high.
Rep. Bill Huizenga (R-Mich.), who introduced the Made in America Motors Act, which proposed a similar but lower tax break, called the deduction “a win for American taxpayers, auto workers, and Michigan.”
Huizenga noted in a statement that making car loan interest tax-deductible fulfills a Trump presidential campaign promise and “provides financial motivation for individuals and families to purchase American-made vehicles.”
Sen. Bernie Moreno (R-Ohio) sponsored a bill with a similar proposal, the USA CAR Act.
“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. I’m proud to lead the way in the Senate,” Moreno said when introducing his bill.
- Proponents also stress that, as mentioned, the deduction is structured as an above-the-line benefit, so taxpayers can claim it even if they claim the standard deduction on their federal returns.
- Some advocates also see the measure as a way to incentivize buying vehicles with final U.S. assembly.
Meanwhile, others question how much relief the deduction will actually provide and whether it is the most effective way to help car buyers.
Jonathan Smoke, chief economist at automotive services and technology provider Cox Automotive, and his team reportedly analyzed the proposed auto loan interest deduction. They found that if the average car owner pays $2,000 in interest over a year, they could save about $400 on their taxes under the initial House GOP version of the proposal.
However, given the overall costs of buying a car, Smoke told Bankrate the company doesn’t “think [the car loan tax deduction is] as exciting a proposition for driving more vehicle sales.”
There are also concerns about the deduction’s fairness and fiscal impact.
The benefit phases out for higher-income households, but some analysts argue that those with the means to buy new cars, especially more expensive models, are more likely to benefit.
On the other hand, many lower-income buyers and those purchasing used or imported vehicles could be left out.
And then there’s the cost: the Joint Committee on Taxation estimates the provision would cost over $57 billion in lost federal revenue, raising questions about its broader economic trade-offs.
EV tax credit 2025?
It looks like electric vehicles could qualify for the proposed car loan interest deduction, provided they meet the same requirements as other vehicles under the OBBB.
Also, the deduction doesn’t seem limited by vehicle type, so qualifying EVs and plug-in hybrids would likely be eligible if they are U.S.-assembled and the loan meets the bill’s other requirements.
But it’s worth noting that while the OBBB contains a new tax break for U.S.-assembled vehicles, the legislation ends the up to $7,500 federal EV tax credit for new electric vehicles and $4,000 for used EVs after September 30th of this year.
- That is much earlier than the 2032 expiration initially set by the Inflation Reduction Act, passed during the Biden administration.
- Under the OBBB, only a small number of new EVs from manufacturers that haven't yet sold 200,000 qualifying vehicles will remain eligible for one additional year.
What about Trump auto tariffs?
Data show that Trump’s auto tariffs introduced in 2025 are already driving up car prices across the U.S.
- The 25% tariff on imported vehicles and parts has reportedly pushed the price of an average new vehicle up by 2.5% in April.
- That’s more than double the typical monthly increase for this time of year, according to Cox Automotive and Kelley Blue Book analyses.
True Car reports that some foreign models have seen increases of $5,000 to $10,000. Global supply chains also affect domestically produced automobiles, some facing added costs of about $2,000 to $3,000.
Note: When it comes to the new car loan interest deduction, most imported vehicles, subject to the new 25% tariff, won't meet this U.S. assembly requirement and will not be eligible for it.
However, some U.S.-assembled vehicles may still include imported parts affected by tariffs. As a result, higher parts costs from tariffs could still push up prices for some qualifying models.
Buying a car: Bottom line
Even with the car loan tax deduction, car buyers shouldn’t lose sight of the bigger financial picture.
The price of the car, interest rates, insurance, upkeep, and any new fees all add up quickly. It’s also important to keep tabs on your credit score, since that can make a big difference in what you pay over the life of your loan.
Recent tariffs could also play a role: a 25% tariff on most auto parts could push prices even higher, even for models assembled in the U.S.
No matter what tax breaks are on the table, it’s worth taking the time to run the numbers, shop around for the best financing, and make sure your car purchase truly fits your needs and budget.
This article has been updated to include information about the definition of "final assembly" in the U.S.
