Calculating the Tax Break: How Trump’s Car Loan Interest Deduction Can Save You
Table of Contents
Trump Proposes Making Car Loan Interest Tax Deductible
Republican presidential candidate Donald Trump made the surprise announcement on 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.
Stimulating Domestic Auto Production
“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.
How Many Millions of Americans Could Benefit?
But just how many millions of Americans could benefit? 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.
Savings by Income Level
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.
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.
Limitations of the Proposal
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. And with only about 10% of taxpayers still itemizing deductions, Trump’s announcement about car loan interest begs the question: Is this just a tax break for the wealthy for their fancy cars?
Implications for High-Income Earners
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.
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. It remains to be seen if this proposal will gain traction or face opposition from lawmakers.
