The “One Big Beautiful Bill” passed by the House, now before the Senate, includes a novel new provision to subsidize the purchase of certain automobiles.  It’s a long way to adoption of this new tax loophole, and the final version could be different.  Tax Notes analyzed the change as passed by the House [“A Closer Look at Car Loan Interest Relief,” June 2, 2025].

Interest on car loans was an itemized deduction until passage of the Tax Reform Act of 1986, which offset its lower rate schedule by removing or limiting various deductions.  The new House bill takes a different approach, making the interest component of certain car loans an adjustment to gross income (“above the line”) rather than a deduction.  Hence, the benefit is available whether or not the taxpayer takes the standard deduction.  Only about 10% of taxpayers itemize their deductions, and they tend to be at the high end of the income scale.  Designing this treatment of auto loan interest an adjustment instead of a deduction means the tax benefit will be available to far more taxpayers.  However, higher-income taxpayers are excluded—the full tax benefit is phased out for singles with adjusted gross income from $100,000 to $150,000, and for marrieds filing jointly from $200,000 to $250,000.

The Federal Reserve Bank of New York reported that total auto loans outstanding in the first quarter of this year came to $1.64 trillion.  Equifax reported that in 2023 there were 22.8 million auto loan originations, with a total value of $681 billion.  A lot of money is on the table.  It’s estimated that Americans bought 16 million cars, SUVs, and light trucks in 2024, and roughly half of them had their final assembly done in the United States, as required by the new law to qualify for the new tax benefit.  Interestingly, the tax benefit is also available for acquisition of a used car, if it meets the “made in the USA” requirement.  However, only interest on loans that originated after January 1 of this year would be eligible.

As a practical matter, how much money is at stake in this new provision, what is the dollar value of the benefit?  Tax Notes provides an example of a married couple buying a $60,000 new car with a 10% down payment. The first-year interest on the $54,000 loan, assuming a 6% interest rate for six years, would come to $3,030.30.  An adjusted gross income of $135,000 would put the couple in the 22% tax bracket, which means that the new adjustment would save them $666.67 when they file their Form 1040.  The benefit declines each year, as monthly payments have larger principal and smaller interest components as time goes by.

As a marketing matter, would the prospect of saving $666.67 on a $60,000 purchase cause someone to buy an American-made car instead of an import?  Time will tell, but the financial incentive seems weak in the decision process.  On the other hand, the Congressional Budget Office projected that the revenue loss from the new provision would be $58 billion over the four years it will be in effect.  That implies that about 20 million taxpayers will get an average tax benefit of $900 each.

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