This single entry on your tax return could potentially save you thousands on your next vehicle | Carscoops

      While potential auto loan tax breaks may be seen as good news for buyers, tariff-related increases in prices could diminish most of the possible savings in many situations.

      Car loan interest could be tax deductible under new legislation supported by the GOP. Only new vehicles manufactured in the U.S. would qualify for this possible deduction. Used cars, ATVs, trailers, and campers do not qualify for this tax plan at all.

      Purchasing a vehicle might soon involve more than just acquiring a new car and adding to your monthly expenses. If a new tax proposal currently being discussed in Washington advances, some car buyers may unexpectedly benefit from a potential reduction in their federal income taxes.

      According to a provision in the latest tax plan from the Senate GOP, which could be presented to President Trump as early as July 4, certain new car buyers may be able to deduct up to $10,000 in auto loan interest from their taxable income. This deduction would apply from 2025 to 2028, creating an incentive for eligible buyers over several years. However, not everyone with a car loan will qualify for this deduction.

      Several Conditions Apply

      Firstly, used cars are not included. If your loan was for a pre-owned vehicle, you won't qualify. Additionally, not all new car buyers will be eligible for the break.

      As reported by CNBC, qualifying vehicles must be new and manufactured in the United States. This includes cars, SUVs, vans, minivans, pickup trucks, and motorcycles, but excludes trailers, campers, and ATVs, which were included in the House version of the legislation but are not present in the Senate draft.

      Moreover, timing is important. Only car loans acquired after December 31, 2024, will be eligible, and the deduction applies solely to the first loan taken out on each vehicle.

      No Eligibility for Used Cars

      There are potential savings, but only for some buyers. Since higher-income individuals are more likely to purchase new vehicles rather than used ones, the bill will largely benefit them.

      Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, stated, “The more you earn, the higher the tax rate you pay, meaning the more benefit you get from this thing.”

      However, the deduction gradually diminishes. For every $1,000 in income exceeding $100,000 for individuals or $200,000 for joint filers, the deduction's value decreases by $200. Therefore, while the initial amount may seem generous, it decreases significantly as income rises.

      Gardner also highlighted an important warning. The anticipated price hikes from President Trump’s proposed 25 percent tariffs on imported vehicles could negate the benefits of the tax break. “That will completely eat up the value of this deduction for a lot of people,” he remarked.