Here’s who would benefit from Trump’s proposed tax break on car loan interest

Former President Donald Trump proposed a new tax deduction last week for car owners who pay interest on an auto loan, one of many tax breaks he has floated on the presidential campaign trail in recent months.

Trump’s proposed tax break would make interest on car loans fully tax deductible. It’s an idea that he compared to the mortgage interest deduction, which allows some homeowners to reduce their taxable income by writing off a portion of their mortgage interest payments each year.

So, which American households would benefit, and how large would the benefit be?

More than 100 million Americans had auto loans in the second quarter of 2024, worth $1.63 trillion, according to the Federal Reserve Bank of New York. The average person had a car loan of roughly $24,000 in 2023, according to Experian.

Someone buying a new vehicle this year would pay, on average, about $1,332 a year in interest charges, according to AAA.

While Trump didn’t offer specific details on how the tax break plan would be implemented, some experts say it would likely provide the most benefits to wealthy Americans.

Such a tax break “mostly would benefit wealthier individuals buying more expensive cars as one has to itemize their taxes to get the tax break,” Jaret Seiberg, financial services and housing policy analyst for TD Cowen Washington Research Group, wrote in a note Thursday.

It’d be “unlikely to benefit entry-level” car sales because such buyers generally have “more modest incomes” and claim a standard deduction on their tax returns, Seiberg wrote.

Either way, the proposal is unlikely to have support among many Democrats or Republicans in Congress, which must pass legislation to adopt the measure, Seiberg said.

A Trump campaign spokesperson didn’t return a request from CNBC for comment or additional detail on the proposal.

During a speech in Detroit on Thursday, Trump compared the policy proposal to an existing federal tax deduction on home mortgage interest.

That tax break lets homeowners deduct annual mortgage interest payments from their taxable income, thereby reducing their tax bill. It’s only available to taxpayers who itemize deductions on their federal tax returns.

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An auto interest deduction would also come at a large cost to the federal government, experts say. To that point, Trump’s proposal on car loan interest would cost about $5 billion a year in income tax reductions, if structured as an itemized deduction, estimates Erica York, senior economist and research director at the Tax Foundation’s Center for Federal Tax Policy.

It would cost about $61 billion over 10 years, from 2025 through 2034, York estimates.

To get the deduction, car owners would need to itemize their tax return to include their borrowing costs. 

However, most taxpayers — about 9 in 10 — don’t itemize their deductions, experts said. Instead, they claim a standard deduction.

A taxpayer’s total itemized deductions would generally have to exceed the standard deduction — $14,600 for single filers and $29,200 for married couples filing a joint tax return for 2024 — for them to get a financial benefit.

About 14.8 million federal tax returns, or about 9%, claimed an itemized deduction on their 2021 federal tax returns, according to the most recent IRS data.

A 2017 tax law signed by then-President Trump reduced the number of taxpayers who itemize their deductions.

An itemized tax break on car loan interest “would help only a fraction of taxpayers,” said Leonard Burman, an institute fellow at the Urban-Brookings Tax Policy Center.

“This percentage might go up a bit if auto loan interest were deductible, but it’d still be true that the vast majority of household would not be able to benefit, and the ones that did would be disproportionately high-income filers,” Burman explained in an email.

About 62% of people who claimed an itemized deduction in 2021 had an adjusted gross income of $100,000 or more, according to IRS data. Such taxpayers claimed about 77% of the total $660 billion of itemized deductions that year, the data shows.

Wealthier individuals generally get more of a financial benefit from tax deductions, York said.

That’s because the value of the deduction depends on a household’s marginal income tax rate, she said.

Here’s a simple example, using AAA’s aforementioned figure of $1,332 in annual interest charges on new cars. A $1,332 tax deduction for someone in the 10% federal tax bracket would be worth about $133, while it’d be worth $493 to someone in the top 37% bracket, according to Burman.

There’s precedent for treating a tax break on car loan interest as an itemized deduction, said York of the Tax Foundation.

The federal tax code allowed taxpayers to claim a deduction for “personal interest” until the mid-1980s. That deduction was for all types of consumer borrowing, including interest on auto loans and credit cards, York said.

However, Congress got rid of those deductions in 1986.

Today, just a few categories of interest payments are tax deductible, such as interest on home loans, student loans, money borrowed to buy investment property and interest as a business expense, according to TurboTax.