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You've probably heard the buzz about the new car loan tax break. Up to $10,000 in interest deductions sounds pretty sweet, right? The One Big Beautiful Bill Act that Trump signed in July 2025 created a temporary deduction for car loan interest.
However, it comes with many restrictions that will likely leave the average car buyer out. And even those who qualify for the deduction may find that the savings don’t come close to offsetting rising car prices from auto tariffs.
Let's break down who actually benefits from this tax break and why it's narrower than you might think.
The Republican tax law allows qualifying taxpayers to deduct up to $10,000 in car loan interest per year on their federal tax returns for vehicles they bought from 2025 to 2028, when the deduction will go away. Unlike most deductions, you don't have to itemize to claim it, which means you can still take the standard deduction and benefit from this break.
That's the good news. Now for everything else.
Four basic requirements knock out a huge portion of car buyers right away. The vehicle must be new, assembled in the U.S., purchased for personal use and the buyer's income must fall within specific limits. Used and leased cars don't qualify. Cars bought for business use also don't qualify.
According to IRS guidance, the location of final assembly should appear on the vehicle information label at the dealership. You can also check the vehicle identification number using the National Highway Traffic Safety Administration's VIN decoder to locate the plant where the car was manufactured.
No car is fully manufactured in the U.S., but the tax break only looks at the final assembly location. According to the White House, about 50% of cars sold in the U.S. are assembled abroad. That means roughly half the vehicles on dealer lots won't qualify, even if they're made by American brands.
Toyota and Kia each assemble only about 30% of their vehicles in the U.S., while Nissan sits at 39% and Volkswagen at 36%. Tesla stands out as the only major car maker that assembles 100% of its cars domestically.
Auto maker
Percentage of U.S. assembly
Audi
0%
BMW and Mini
21%
Ford and Lincoln
74%
General Motors
74%
Honda
75%
Hyundai
26%
Jaguar and Range Rover
0%
Kia
30%
Mazda
18%
Mercedes-Benz
33%
Mitsubishi
0%
Nissan
39%
Porsche
0%
Stellantis (Fiat, Chrysler, Alfa Romeo, Dodge, Jeep, RAM)
50%
Subaru
44%
Tesla
100%
Toyota
30%
Volkswagen
36%
Volvo
21%
Source: National Highway Traffic Safety Administration
Learn more: Missed the $7,500 EV tax credit? Here's why you might be better off
If your car qualifies, the next step is to check if your income also qualifies. The deduction begins to phase out at $100,000 in modified adjusted gross income (MAGI) for single filers and $200,000 for married couples filing jointly.
Your deduction drops by $200 for every $1,000 your income exceeds these thresholds and becomes unavailable once you hit $150,000 for single filers or $250,000 for joint filers.
💡What is MAGI? It’s your adjusted gross income (AGI), located on line 11 of your tax return, with certain items added back in, such as foreign income or tax-exempt interest. For most people, MAGI and AGI are the same or very close.
These income limits sound reasonable on paper, but they don't match up with who actually buys new cars. The average household income for new-car buyers was $115,000 in 2023, according to Cox Automotive. This compares to the median household income of $83,730.
With the average new car now reaching over $50,000 according to Kelley Blue Book, lower-income households either can't afford new vehicles or are shopping in the used market instead. This means that the people who need help affording a car the most won't benefit from this tax break.
But even if they could afford a new car, many wouldn't benefit much from the deduction. If you're a married couple earning around $35,000 a year, you're just above the 2026 standard deduction of $32,200. At that income level, you may not owe much federal income tax, which means the deduction likely won't save you anything meaningful.
The deduction targets middle to upper-middle income earners. The Joint Committee on Taxation estimates the deduction will cost $57.7 billion, but that cost benefits a relatively small group of buyers who meet all the criteria: right income range earners who are financing a U.S.-assembled new car for personal use.
If everything aligns, the deduction could trim a few hundred to a thousand dollars off your tax bill each year through 2028. But keep in mind that the deduction expires after 2028, so if you finance a car today over five or six years, you'll only be able to deduct interest for the first two or three years of the loan.
Learn more: Big tax changes coming that may boost your refund — or shrink it
The savings aren't as dramatic as you might hope.
New car buyers with excellent credit scores can often snag promotional financing rates of 0% APR or close to it from manufacturers. Since you need to be paying interest to benefit from this deduction, paying 0% APR means there’s nothing to deduct.
But many buyers don't get those promotional rates. Let's look at what you'd actually save if you finance at typical market rates. In September 2025, the average cost of a new vehicle exceeded $50,000. The average new car loan interest rate was 6.73% in early 2025. On a $50,000 loan at that rate over 60 months, you'd pay roughly $3,400 in interest during the first year.
If both you and your car qualify and you’re in the 22% tax bracket, you can deduct that full $3,400 and save about $680 on your taxes. Better credit means lower rates, which means less interest to deduct. A super prime borrower paying 5.18% APR on that same loan would pay about $2,600 in first-year interest, translating to roughly $520 in tax savings. Not nothing, but not a windfall either.
To max out the full $10,000 deduction, you'd need to finance a much more expensive vehicle. At 6.73% APR, you'd need to borrow around $162,000 to pay $10,000 in interest during the first year. That puts you well above what most buyers are financing.
However, anyone who can actually afford a $161,000 car loan probably earns too much to qualify for the deduction at all. The sweet spot is narrow and contradictory. You need to earn enough to afford an expensive car, but not so much that you lose the deduction entirely.
The people most likely to max this deduction out are those with substantial wealth but low reported taxable income. This may include retirees living off sizable Roth distributions, business owners sheltering income through deductions, or investors holding tax-exempt municipal bonds. This means that the wealthier buyers, who need help the least, receive the largest tax break.
Even if you qualify for this deduction, Trump’s auto tariffs might eliminate any savings you'd get.
According to J.P. Morgan, the combined tariffs on vehicles and parts will increase car costs by about $2,580 per vehicle in the first year, roughly 5.8% of the average retail price. In year two, that tariff cost increases to approximately $2,806 per vehicle. By year three, the tariff impact could reach $3,258 per vehicle.
Automakers and consumers are expected to share these costs equally, which translates to a projected 3% increase in new vehicle prices, significantly outpacing the savings you might get from the interest deduction.
Those who don’t qualify for this deduction face the full impact of higher car prices.
Learn more: Shoppers face shocking tariffs on basic purchases: 7 steps to dodge the chaos
The promise of a tax break can cloud judgment when you're making a major purchase. Before you factor any potential deduction into your buying decision, run the numbers on whether you'll actually qualify and how much you'll realistically save. A modest tax benefit shouldn't drive a six-figure financial commitment.
Calculate the true cost before the tax break. Make sure you can afford the monthly payment, insurance premium, maintenance and fuel without counting on a deduction. Remember that the deduction expires in 2028, but your car payments and costs will stick around.
Consider used vehicles. A reliable three-year-old car can cost 30% to 40% less than new, even without any tax break. The depreciation you avoid often exceeds any deduction you'd get on a new car loan.
Shop your financing separately from the car. Get pre-approved with your bank or credit union before visiting dealerships. Dealer financing can be competitive, but you'll negotiate better knowing what rate you already qualify for.
Focus on the interest rate, not the monthly payment. Dealers love stretching loans to 72 or 84 months to hit your target payment, but you'll pay thousands more in interest. If you're already locked into a high-rate loan, refinancing your auto loan could help you reduce those interest costs.
Skip the dealer add-ons and extended warranties. Paint protection, fabric coating and gap insurance marked up 300% at the dealership rarely pay off. Look for full coverage from your regular insurer and look into adding gap insurance if you need it.
Learn more: 7 dirty car dealership tricks that almost cost me thousands (and how to fight back)
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'Never buy a new car'? This money expert did — twice — and still saved money
📩 Have thoughts or comments about this story — or ideas on topics you’d like us to cover? Reach out to our team.
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