Trump’s New Car-Loan Tax Break Might Break Your Brain

It is about boosting all American-made autos, not just EVs, but not all buyers benefit, they must be patient and the incentive is modest.

General Motors’ finance chief predicts car shoppers are going to come to dealer lots with a new question: “Where was this vehicle built?”

A new tax deduction is less generous, less immediate and harder to estimate than the current one for electric cars.

That is because in President Trump’s new tax law, car buyers can qualify for a tax deduction on interest from car loans used to finance the purchase of vehicles assembled in the U.S.

The new deduction is more widely available than the $7,500 credit for buying an electric vehicle, which expires at the end of September. It is also less generous, less immediate and harder to estimate.

For automakers like GM and their dealers, that means a possible sales bump. For buyers whose incomes aren’t too high, it is an opportunity for a deal on a new car or truck. The challenge is to sort it all out.

“No one—not your car salesman, not your tax preparer, not your boss—is going to know for sure if you qualify for this,” said Patrick Anderson of Anderson Economic Group, a Michigan-based consulting firm.

How does it work?

Republicans’ “one big, beautiful bill” created a tax deduction for interest paid on loans for domestically assembled new vehicles purchased from 2025 through 2028. Used cars aren’t eligible. Neither are leased cars. The vehicles must be for personal use.

Unlike the current $7,500 EV incentive, the new interest deduction won’t help you pay less at the dealership. Instead, the savings come once a year through your tax return. (Importantly, it can be used even without itemizing deductions.)

“So many consumers tend to negotiate their car purchases just by monthly payment, and this is not a monthly deduction,” said Melinda Zabritski, a finance expert at Experian Automotive. “You do have to wait for tax time.”

What kind of car do you have to buy?

Any passenger vehicle—electric, hybrid, regular old gasoline-burning—is eligible, at any price, as long as it is assembled in the U.S.

Of the 16 million new vehicles expected to be sold in the U.S. this year, 1 million to 1.8 million could qualify the purchaser to take the new deduction, consulting firm AlixPartners estimates.

Popular qualifying vehicles include the Ford F-150, Jeep Grand Cherokee and Tesla Model Y, which can all stretch into luxury-price territory.

The most affordable vehicles on U.S. dealership lots tend to be assembled overseas, making them ineligible for this tax break.

Of the 10 cheapest new models on the market, only one—the Toyota Corolla—is eligible for the interest deduction, according to the Journal’s analysis of Kelley Blue Book data.

The others—including Nissan’s Versa, GM’s Chevy Trax and Hyundai’s Elantra—are assembled in Mexico or South Korea, which helps keep their starting prices around $20,000.

And while most Corolla sedans offered in the U.S. are made in Mississippi, if you want the fuel-saving hybrid model, forget about the tax break. That version is made in Japan. The Corolla Cross hybrid, however, is built in Alabama.

To know where a vehicle is assembled, you can check the window sticker that all new vehicles are required to have. You can also hunt down the vehicle identification number, or VIN, and input all 17 digits to the federal VIN Decoder, which will tell you the “plant of manufacture” where the vehicle was assembled.

Who can take advantage?

To qualify for the full deduction, single taxpayers must have adjusted gross income of less than $100,000 for an individual, or $200,000 for a couple filing jointly. Above those thresholds, the credit phases out.

Adjusted gross income is your income from all sources, including bank interest and investments in addition to your paychecks, minus deductions like retirement contributions and student loan interest.

Given that the average price of a new vehicle is almost $50,000, a key question about the new policy is, how many people earning less than $100,000 a year can afford to buy one?

Lenders generally require your monthly payment not to exceed 15% to 20% of your income, so a person would likely need at least $50,000 in annual income to afford a new vehicle, Zabritski said.

“Quite a few consumers will get phased out” of the tax break because their income is too high, she said.

How much can you save?

Using data from Experian on the average amount consumers financed for a new vehicle ($41,720), the average interest rate for new loans (6.73%) and the average term (just shy of six years), we calculated that the tax incentive would be worth $576 in the first year. Its value decreases annually from there, to $36 in the sixth year, assuming Congress renews this break beyond its 2028 expiration.

To calculate the value of this deal for yourself, you have to make a lot of assumptions. Do you know that your income will be under the threshold this year and years into the future? Do you know your marginal tax rate? Do you know what marginal tax rate you may face in the future, as your income grows?

Also, if today buyers take out a five- or seven-year car loan, they can only bank on receiving this incentive during the first few years of the loan. Whether it continues beyond 2028 will be up to whomever controls Congress and the White House in the future.

The benefits of the new tax break are modest, said Jonathan Smoke, chief economist at Cox Automotive. “Overall, any incentive for new-vehicle buyers is welcome, but this tax credit is likely more of a sound bite than a market mover,” he said.

Write to Christopher Otts at christopher.otts@wsj.com