GOP Introduces Tax Deduction for Auto Loans: Eligibility Criteria for Vehicles and Purchasers
The One Big Beautiful Bill (OBBB), the new tax law signed into law on July 4, 2022, extends and makes permanent tax breaks from Trump's 2017 Tax Cuts and Jobs Act (TCJA). Among these changes is a significant benefit for car buyers: a tax deduction for car loan interest.
This deduction applies to new cars, minivans, vans, SUVs, pickup trucks, or motorcycles, provided they weigh less than 14,000 pounds and have their final assembly in the United States. Popular imports from manufacturers like Honda, Hyundai, Nissan, and Toyota may not qualify unless they have a U.S. assembly line.
The deduction will start with purchases made in 2025 and run through 2028. The loan must originate after December 31, 2024. It's worth noting that the deduction is available whether or not you itemize your deductions.
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. The deduction reduces by $200 for every $1,000 above these thresholds.
For the average car owner paying $2,000 in interest over a year, this deduction could save them about $400 on their taxes under the initial House GOP version of the proposal. If a qualifying vehicle loan is later refinanced, interest paid on the refinanced amount is generally eligible for the deduction.
However, it's important to consider the bigger financial picture when making a car purchase. This includes the price of the car, interest rates, insurance, upkeep, any new fees, and your credit score. 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.
It's also important to keep in mind that the 25% tariff on most auto parts could push prices even higher, even for models assembled in the U.S. Trump's auto tariffs introduced in 2022 have already driven up car prices across the U.S., with some foreign models seeing increases of $5,000 to $10,000.
The National Highway Traffic Safety Administration VIN decoder tool could be useful in indicating where your car was assembled. 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.
Lastly, it's important to note that the OBBB 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. However, electric vehicles could still qualify for the proposed car loan interest deduction, provided they meet the same requirements as other vehicles under the OBBB.
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