If the GOP's proposed bill gets sanctioned into law, taxpayers might enjoy some additional tax relief. The proposed legislation currently allows deductions up to $10,000 in auto loan interest; however, it comes with certain conditions, and its final approval from the Senate remains uncertain.
The tax bill provision that disallows the tax on auto loan interest lets taxpayers deduct up to $10,000 of their auto loan interest. It is an overall limit and not a yearly one, and it is an above-the-line deduction, meaning it can be availed in addition to the standard deduction.
However, this deduction has many strings attached. It will only hold from the 2025 tax year to the 2028 tax year and will begin phasing out once an individual taxpayer's adjusted gross income exceeds $100,000 or when joint taxpayers' AGI goes above $200,000. The deduction reduces by $200 for every $1,000 of AGI that surpasses the set limits. Furthermore, it only applies to passenger vehicles assembled in the U.S., which is seen as a potential boost to domestic car ownership.
According to CarEdge, a car leasing marketplace, 117 new cars and truck models have their final assembly in the U.S., but it remains to be seen whether the proposed deduction will apply to used auto loans.
Suppose a borrower takes a $30,000 loan with a 6.35% annual rate to purchase a Ford Escape. In this case, taking the tax break could potentially save around $224 for a single filer. The savings could be significantly higher for borrowers with high-interest loans or for those who move to a lower tax bracket due to this deduction.
However, these savings are purely hypothetical at this point. Though the budget bill passed in the House in May, it still await approval from the Senate. Certain GOP senators have raised concerns about the bill. However, the tax deduction on auto loan interest, a part of the Trump campaign, has not received widespread criticism. Mark Luscombe of Wolters Kluwer Tax & Accounting predicts that it is fairly likely to stay in the final bill. If the Senate alters the bill, it needs to return to the House for approval and finally reach President Trump for his signature.