Senate’s Proposed Tax Break for Auto Loan Interest

The Senate Finance Committee has introduced a significant multitrillion-dollar tax package that includes a tax incentive aimed at easing the burden for drivers by allowing them to deduct interest on their auto loans. However, tax specialists have noted that this benefit is primarily geared towards new vehicle purchases, leaving used car buyers at a disadvantage.

Overview of the Tax Plan

As part of an extensive domestic policy initiative, the Senate Republican tax proposal seeks to deliver tax relief while also implementing cuts to health program funding, such as Medicaid and the Affordable Care Act. The House had previously advanced its own version of the plan, known as the "One Big Beautiful Bill Act," which passed earlier this May.

A key aspect of the Senate proposal is the provision that permits taxpayers to deduct up to $10,000 in auto loan interest from their taxable income. Data from AAA indicates that in 2024, the average consumer is expected to incur approximately $1,332 in annual interest on loans for new vehicles.

This deduction, initially proposed during the previous presidential campaign, is set to be available for a four-year period, spanning from 2025 to 2028.

Who Can Qualify for the Deduction?

To qualify, vehicles must be assembled in the U.S. and can include cars, minivans, vans, SUVs, pickup trucks, or motorcycles intended for personal use. Notably, the legislation excludes all-terrain vehicles, trailers, and campers—categories that had been included in the House’s corresponding bill.

The tax break is only applicable to loans secured after December 31, 2024, and it must be the first loan associated with the vehicle.

Restrictions on Vehicle Types

In contrast to the House’s proposal, the Senate’s version restricts the deduction to loans for new vehicles only. Legislative language specifies that the vehicle’s original use must commence with the taxpayer, which, according to tax experts, implies that only brand new cars can take advantage of this deduction.

This restriction could hinder the effectiveness of the tax cut for many individuals, especially those from low- and middle-income brackets who frequently purchase used vehicles.

Impact on Vehicle Buyers

According to a 2023 survey from researchers at UCLA, nearly 61% of low- and middle-income households reported acquiring used cars, while only 39% had purchased new ones. On average, households buying new vehicles in 2023 had incomes of approximately $115,000, compared to $96,000 for used vehicle purchases.

Industry analysts at Cox Automotive predict that over 20 million households are likely to purchase used cars in 2025. They also forecast that new vehicle sales could reach about 16 million units this year, although this outlook is complicated by tariffs imposed during the prior administration.

Tax Benefits for Different Income Levels

The proposed auto loan interest deduction is structured in such a way that it disproportionately benefits higher-income earners. The value of tax deductions grows with income levels, as those who earn more typically pay higher federal tax rates. For individuals whose annual income exceeds $100,000, the value of the deduction starts diminishing, dropping to $200 for every $1,000 earned above this threshold. For married couples filing jointly, the threshold is $200,000.

Higher tariffs on imported vehicles and auto parts are expected to contribute to increased vehicle prices. This may further diminish the value of the proposed tax incentive for numerous taxpayers. As William McBride, chief economist at the Tax Foundation, pointed out, one of the most significant changes from the House version appears to be the exclusion of loans on used vehicles.

Conclusion

The Senate’s tax package proposes valuable benefits for auto loan interest deductions but may primarily assist those purchasing new vehicles. Low and middle-income taxpayers, who are more inclined to buy used cars, may find the deductions less beneficial or completely inaccessible. The overall structure and restrictions may lead to a substantial imbalance, favoring higher earners over working-class families.