Republican presidential candidate Donald Trump made the surprise announcement Thursday that he plans to make car loan interest tax deductible, a move that — if actually adopted — could help millions of Americans who are carrying auto loan debt.

“This will stimulate massive domestic auto production and make car ownership dramatically more affordable for millions and millions of working American families,” Trump said in remarks at the Detroit Economic Club.

But just how many millions? While details on the policy are limited, initial analyses find it may not reach as many car owners as expected. And tax experts say while the proposal could save car owners hundreds of dollars per year, the richest Americans would benefit most.

At the individual level, a typical lower-income car buyer could save about $150 per year, based on current new vehicle interest rates, Garret Watson, senior policy analyst and modeling manager at the Tax Foundation, tells Money. Middle-income consumers could save about $270 and the highest-earners could save around $950, Watson’s analysis shows.

The estimated savings factor in the differences in average loan amounts by income. Americans with higher incomes would benefit more not only because their tax rates are higher, but also because they tend to drive more expensive vehicles.

How a tax deduction for car loan interest would work

To translate the proposal into plain English, the former President is saying he wants to give car owners the ability to subtract the finance charges they pay on their auto loan from their income, thereby lowering how much they have to pay in federal income taxes.

As a reminder, tax deductions are less valuable than tax credits; credits reduce the taxes you owe dollar for dollar, while deductions reduce your income that is taxed.

Here’s where it gets more complicated: Most deductions are itemized deductions, which means in order to claim them, you have to itemize your tax return and forego claiming what’s called the standard deduction. You typically only want to do this if the itemized deductions you qualify for are worth more than the standard deduction. And since 2018, when the standard deduction got a big boost, the math hasn’t worked for most people to itemize. In 2024, the standard deduction is worth $14,600. Regardless of how much you theoretically could deduct through itemized deductions, you can instead take the standard deduction and simply pay no federal income tax on your first chunk of income up to that amount.

With only about 10% of taxpayers still itemizing deductions — and most of those people being high-earners — Trump’s announcement about car loan interest begs the question: Is this just a tax break for the wealthy for their fancy cars?

The answer, to some extent, depends on whether he envisions treating car loan interest the same way as mortgage interest, where you can only deduct what you paid if you itemize.

However, there’s another a category of deductions called “above-the-line” deductions, which you can take in addition to the standard deduction. Examples include student loan interest and traditional individual retirement account (IRA) contributions. If this is how the tax code were to treat car loan interest, a wider swath of the 100 million Americans with auto debt would stand to benefit, since all car loan holders with tax liability could potentially qualify.

The detail about whether it would be an above-the-line deduction or not makes a significant difference in the size of the tax benefit and the revenue cost, Watson says.

If the proposal is designed to benefit taxpayers regardless of whether they take the standard deduction, Watson estimates a total cost in the ballpark of $21.3 billion. If the plan only benefits itemizers, the estimated cost is in the ballpark of $4.7 billion.

Trump’s exact words were that his government “will make interest on car loans fully deductible.” Watson notes you might read that word “fully” to indicate it would, in fact, apply to non-itemizers, though it’s certainly not clear. The term could also refer to the amount of interest you’re allowed to deduct. With the student loan interest deduction, for example, you’re only allowed to deduct up to $2,500 in interest, even if you paid more.

Who benefits most from a deduction on car loan interest?

Even in the above-the-line deduction scenario, there will be opponents of the plan who will argue that it would be bad tax policy because it provides the greatest tax breaks to those who need it least: wealthier Americans who finance expensive cars.

Len Burman, a fellow at the Urban-Brookings Tax Policy Center, has also run some numbers and found the proposal strongly favors the rich.

“The benefits are highly regressive—worth most to those with high incomes and little or nothing to lower-income filers,” Burman said in an email.

According to AAA data, the average new car purchase comes with annual interest of $1,332. Using that figure — and not factoring in differences in loan balances and auto loan rates based on income — Burman shared the following analysis of how households would benefit based on their tax bracket:

In 2021, 20% of tax returns filed by single individuals under 65 fell into the “zero bracket,” meaning they wouldn’t get any benefit from a car loan interest deduction because they didn’t owe income taxes. The same applies to those who don’t need to file tax returns, many of whom are older adults.
Additionally, 16% are in the 10% tax bracket, so they would save $133, or 10% of $1,332.
The top 1% with incomes in the 37% bracket (people who earned over $536,150 in 2021) would save $493.

The bottom line

Trump’s proposal to make car loan interest tax deductible is the latest in a string of campaign proposals to eliminate various parts of the tax code. Other notable promises from Trump include ending taxes on tips, ending taxes on Social Security benefits and ending taxes on overtime pay.

Vice President Kamala Harris also supports the idea of ending taxes on tips but has not endorsed the other three proposals. It’s critical it remember that details about how any of these proposals would actually work are still limited and all of them would require Congressional action.

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On Thursday, Republican presidential candidate Donald Trump surprised the public by announcing his plan to make car loan interest tax deductible. This move, if implemented, could potentially benefit millions of Americans who are currently struggling with auto loan debt.

During his speech at the Detroit Economic Club, Trump stated, “This will stimulate massive domestic auto production and make car ownership dramatically more affordable for millions and millions of working American families.” However, experts are skeptical about the actual impact of this proposal. While details are still limited, initial analyses suggest that it may not reach as many car owners as expected. Additionally, tax experts point out that the wealthiest Americans would benefit the most from this policy.

According to Garret Watson, senior policy analyst and modeling manager at the Tax Foundation, the estimated savings for a typical lower-income car buyer would be around $150 per year, while middle-income consumers could save about $270 and the highest-earners could save up to $950. These calculations take into account the differences in average loan amounts by income, as higher-income individuals tend to drive more expensive vehicles.

To better understand how this tax deduction for car loan interest would work, it is important to note that deductions are less valuable than tax credits. While credits directly reduce the taxes owed, deductions only lower the taxable income. In order to claim deductions, taxpayers must itemize their tax returns, which means giving up the standard deduction. However, since the standard deduction was significantly increased in 2018, it has become more beneficial for most people to simply take the standard deduction instead of itemizing.

With only about 10% of taxpayers still itemizing deductions, and most of them being high-earners, Trump’s proposal raises the question of whether this is just a tax break for the wealthy and their expensive cars. The answer to this question depends on whether car loan interest would be treated the same way as mortgage interest, where only the amount paid can be deducted if the taxpayer itemizes. However, there is also a category of deductions called “above-the-line” deductions, which can be claimed even if the taxpayer takes the standard deduction. It remains to be seen how car loan interest would be classified under this category.

In conclusion, while Trump’s proposal to make car loan interest tax deductible may seem like a promising solution for struggling car owners, it is important to consider the potential limitations and implications of this policy. Only time will tell if this proposal will truly benefit the millions of Americans who are carrying auto loan debt. 

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