Auto Interest Deduction Proposal

The House-passed draft tax legislation would create a new above-the-line deduction of up to $10,000 for "qualified passenger vehicle loan interest" per year. The deduction phases out starting when the taxpayer’s modified adjusted gross income (MAGI) exceeds $100,000 ($200,000 for joint returns). An "applicable passenger vehicle" that qualifies for the interest deduction is defined as one that is (1) manufactured primarily for use on public streets, roads, and highways, (2) has at least two wheels, (3) is a car, minivan, van, sport utility vehicle, pickup truck, or motorcycle, if (4) the final assembly of the vehicle occurs in the U.S. The deduction proposed would be temporary and allowed from tax years 2025 through 2028.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions about the Trump administration’s plan to introduce a new deduction for interest on car loans.

Below is a summary of the debate that ensued between the two professors.

Their Votes:





Their Reasons:

Byrnes: Hundreds of millions of Americans have auto loans. They often have no choice and must both purchase a vehicle to get to and from work. Lower-income taxpayers are also the most likely to require financing. The proposal also phases out for high-income taxpayers, so we cannot say that this is a provision that only benefits the wealthy.

Bloink: Deductions are created in order to incentivize certain behaviors or give tax breaks to individuals who are struggling with uncontrollable financial losses, such as high medical costs or expenses related to natural disasters. Buying a new car doesn't fall into either of these categories and it makes very little sense that we should add to the deficit by creating a deduction for what is essentially a personal choice-type purchase more akin to credit card debt.

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Byrnes: Auto loan interest does not fall into the same category as interest on credit card debt because a vehicle is often a must-have item for most taxpayers—so, said interest should be treated differently for tax purposes. Auto loan interest is more aptly comparable to mortgage interest, so it's fair to create a new deduction to benefit taxpayers struggling with car loans just as we allow for a mortgage interest deduction.

Bloink: Logically, we can already see that the interest deduction for car loans is going to primarily benefit higher income taxpayers who are more likely to buy expensive vehicles. The proposals contain no restrictions on the cost of the qualifying vehicle. We all know that wealthy taxpayers are able to manipulate their MAGI calculations. If we want to help lower-income taxpayers, we should be more focused on student loan interest relief than auto interest relief..

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Byrnes: The Trump administration’s proposal does contain a built-in safeguard in the form of income phase-outs starting at $200,000 for a joint return. That ensures that the primary benefits will go to the lower-income taxpayers who need help most when it comes to financing a vehicle. This provision will also go a long way toward encouraging people to buy American-made products, as the final vehicle assembly must occur in the U.S. for the deduction to apply.

Bloink: When we break this proposal down, it’s clear that the interest deduction for car loans would be even more valuable than the mortgage interest deduction. That’s because this is an above-the-line deduction, rather than an itemized deduction. By creating this new deduction, which only adds to our revenue problems, we’re saying that taking out an auto loan is as valuable from a tax perspective as saving for retirement—and, frankly, less valuable than taking out a loan to finance higher education. This deduction is purely motivated by politics and will serve to add to the tax code’s complexities and do nothing to decrease the deficit.