As affordability remains a key concern in the U.S. auto market, President Trump has introduced a tax policy that allows individuals to deduct interest paid on car loans for new vehicles assembled in the United States. This change stems from legislation signed into law in July 2025, fulfilling a campaign pledge to support domestic car production and ease consumer costs.
The tax deduction arrives during a period of market instability, with car prices impacted by tariffs and shifts in electric vehicle subsidies. While the new measure has been framed as relief for buyers, its real-world impact appears limited in scale and scope.
Modest Savings for Buyers, Limited Reach for Lower-Income Americans
The auto loan interest deduction enables eligible individuals to write off interest paid on loans for new cars built in the U.S., as long as their adjusted gross income is under $100,000 ($200,000 for joint filers). According to Cox Automotive senior economist Jonathan Smoke, the annual savings per taxpayer are expected to remain in the range of just a few hundred dollars. The deduction will be valid only between 2025 and 2028, and it must be claimed in addition to the standard tax deduction.
To qualify, buyers must have taxable income, and the deduction does not apply to leased or used vehicles. According to Sarah Austin of the Institute on Taxation and Economic Policy, the benefit is out of reach for lower-income households that mostly purchase used cars. She noted, “If you want to say that this is about affordability and improving affordability of cars then it makes it really hard to feel like you’ve done your job well if most of the market is out of reach of this deduction and not actually able to use it.”
Senator Bernie Moreno of Ohio, who helped craft the policy, argued that excluding used cars was a deliberate choice to promote fleet renewal and improve safety and environmental outcomes. However, he acknowledged that omitting leased vehicles left out a substantial portion of the market. “We only really provided relief for the 50 percent that finance,” Moreno said. “We didn’t provide any relief for the 50 percent that lease, So that’s teed up next to get done.”
Industry and Political Reception Divided over Potential Impact
Reactions to the tax break have varied, with supporters touting it as a populist win, while others question its broader economic effect. Amy Hunter Wright, a spokeswoman for the National Automobile Dealers Association, said the deduction is a “good thing from a dealer’s perspective,” pointing to increased affordability as a potential sales driver.
On the other hand, the deduction’s actual impact on domestic manufacturing and consumer behavior remains uncertain. According to Adam N. Michel, tax policy director at the Cato Institute, any financial benefit from the deduction may be offset by rising car prices due to tariffs introduced by the Trump administration. “To the extent that these tariffs actually go into effect and they increase prices for cars, that will offset any benefit you get from this deduction,” he said.
Analysts also expressed concerns about the policy’s complexity. Richard Pon, a San Francisco-based accountant, warned that many taxpayers may not know how to determine where their vehicle was assembled or calculate the total interest paid. “People will miss it, so people have to be on the lookout for this,” he explained.
Despite these reservations, the deduction is expected to be one of the most widely claimed among Trump’s recent tax reforms, which also include changes related to tips and overtime pay. Patrick L. Anderson of Anderson Economic Group said the measure could benefit over 100 million Americans who are likely to finance a car within the next five years.
