Trump’s budget bill will affect all aspects of the economy
The budget bill passed and signed the law touches on the lives of all Americans in one way or another. Will you get better or worse?
- The new tax credit will allow you to deduct interest on new car loans for vehicles collected in the United States until 2028.
- Experts believe that tax credits are unlikely to shift the market significantly in favor of new cars to second-hand cars, as price differences increase.
For value-oriented consumers, second-hand cars are generally considered better deals than new cars.
Will the new Trump tax cut change that equation?
One big beautiful bill law promises “no tax on interest on car loans.” This is one of several new tax cuts in the new law.
Here’s what the “no tax” provision actually means: Between now and 2028, car buyers can deduct any interest paid on their new car loans. Tax credits will no longer be available in 2029.
There are a few things to be aware of. among them:
- You cannot deduct interest in excess of $10,000 in a year.
- If the modified adjusted gross income exceeds $100,000, or if a married couple has jointly filed, the deduction will be step-by-step, step-by-step.
- Tax credits do not work on used cars or loans made prior to 2025.
- The vehicle must have a “final meeting” in the United States. (Your dealer can explain it.)
President Donald Trump has adjusted his tax credit to reward carmakers to build American cars and consumers to buy them.
Is a “big beautiful” tax cut a game changer?
Are the new deductions big enough to change the dynamics of the automotive market?
Probably not, experts say.
Sean Tucker, Chief Editor of Kelley Blue Book, said: “But at the end of the day, I don’t think this will have too many effects. It’s not just a number and I don’t intend to exist for a while.”
First of all, let’s clarify this. Tax credits are deductions and not credits.
Tax credits reduce the amount of tax you owe. The $10,000 tax credit cuts the tax by $10,000.
Tax credits reduce taxable income. If you are paying a 22% tax rate, the $10,000 deduction will reduce your tax amount by $2,200.
“The $10,000 sound really, really good, but the final number of taxpayers is a surprise to many taxpayers,” said Mikros Ringbauer, CPA in Southern California.
In reality, few people are likely to ring nearly $10,000 in deductible interest on new car loans, according to auto industry experts.
Consumer Reports estimates that the average buyer could save about $500 a year on the new tax credit. “However, the difference in cost between a new and used car can be simple for thousands of dollars.”
A $23,000 price gap separates new and used cars
According to the Kelley Blue Book, the average new car sold for $48,907 in June. An average used car listed in early July for $25,512. The price difference is just over $23,000.
Everything else is equal, and that number – $23,000 – is how much you have to save from the new tax credit to make your new car a better deal than a used car.
“We know that on the average loan now, buyers pay around $2,000 a year,” Tucker said. The new tax credit “is going to save about $400,” he said.
With a $400 annual savings, it takes about 58 years to save $23,000 on a new car loan. Car loans are long, but not very long.
Of course, there is a reason why new cars are more expensive than used cars. Newer cars may last longer than second-hand cars. Many times newer cars have generous guarantees. Repair costs increase with the age of your vehicle.
New car buyers pay insurance premiums
Automobile buyers pay a tremendous premium for new vehicles. The old axiom believes that if a new car drives from the lot it will lose $1,000 worth.
Given the rising costs of new cars, those numbers are hopelessly outdated. Partially, the new vehicle loses at least 10% of its value on the first day you own it, then 10% to 15% of its value from 10% to 15%.
Another perk for new car buyers: New car loans tend to carry lower interest rates than used car loans. According to Edmunds, the average annual rate in June was 10.9% for used cars and 7.3% for new cars.
Because borrowing costs are low for new cars, an interest tax credit may not be very meaningful in these transactions, automobile experts say.
However, tax credits tend to pay higher interest rates, which may prove useful for new car buyers with lower credit scores.
“It really helps those who need it most,” said Edmonds insight director Ivan Dooley. “If you’re repairing your credit, if you damage it, if you don’t have it, this will be the most profitable for you.”
How to determine if a car was “built in America”
Analysts say Trump’s new car tax credit may not be a game changer, but it could tweak some new car buyers for vehicles built in the US.
About half of the new vehicles sold in the US last month were manufactured in the country, Drury said.
To qualify for the deduction, a car or truck must have a “final meeting” in the United States. That information is listed on the vehicle information label and is generally placed on the dealer’s car windows. The federal VIN decoder can also tell you where the vehicle was built.
Do not assume that “imports” are being built in other countries. Many are assembled into American plants. And many “American” cars are assembled overseas.
If you quickly step into the showroom of your new car, sales staff will probably have information at your fingertips.
“Does the dealer talk about this?” Drury said. “You better believe it.”
