Trump proposes car loan tax deduction — Here's what it means

Donald Trump has proposed making car loan interest fully tax-deductible — claiming it will lower car ownership costs and boost U.S. auto sales. 

Driving the news: In a speech at the Detroit Economic Club, Trump compared his plan to the existing mortgage interest deduction. He also vowed to ban Chinese-made autonomous vehicles from U.S. roads and to renegotiate the U.S.-Mexico-Canada Agreement (USMCA).

• Trump’s tax cut promises are nothing new. They include eliminating service worker tip taxes and reinstating state and local tax deductions. But, tax experts question this pledge — doubting its impact and feasibility.

What they’re saying: The former President argued the policy would “stimulate massive domestic auto production and make car ownership dramatically more affordable for millions and millions of working American families.”

Why it matters: Trump’s pitch comes as car affordability is being squeezed by high interest rates, elevated vehicle prices, and tighter credit conditions. While a deduction on car loan interest could make ownership more accessible in theory, it is unlikely to benefit most Americans.

• Nearly 90% of taxpayers now claim the standard deduction instead of itemizing, meaning they wouldn’t qualify for this deduction, according to Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting. Under Trump’s own 2017 tax reform, the standard deduction was increased, making itemizing less common.

The details: Trump's plan would work like the mortgage interest deduction. But, it's not a one-size-fits-all solution.

• If Trump's plan became law, taxpayers who itemize deductions could add car loan interest to their list.

• However, with fewer taxpayers itemizing today, the potential benefits would likely only reach those already benefiting from other deductions (typically, wealthier individuals).

The economic impact: Jonathan Smoke, chief economist for Cox Automotive, estimates that someone financing a $42,000 vehicle at today’s average interest rate of 9.5% would save about $900 in taxes in the first year, assuming they fall into a 24% tax bracket.

• But since interest payments are highest in the initial years of a loan (amortization), the deduction would shrink over time.

• The proposal could also reduce federal tax revenue without providing meaningful benefits to the broader car buying public.

Between the lines: The proposal may appeal to some car buyers. But, many would see little benefit unless they itemized their deductions. In fact, this could just be another excuse for people who can't afford payments to get in too deep on their loans.

• Auto lenders are more likely to restructure loans to absorb the tax benefits. This would raise vehicle prices and offset any potential deductions.

The bottom line: Trump’s proposal might sound attractive to a Detroit audience struggling with high car loan rates. But it’s a complex pitch with limited benefits. Whether it’s a real game-changer for American families—or just a campaign talking point—will depend on who it actually helps.

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