Former President Donald Trump dropped a bit of a tax bombshell at the Detroit Economic Club on Thursday, saying he plans to propose making interest on car loans fully deductible.
Trump, knowing the idea might play in the Motor City, waited well into his lengthy speech to disclose the idea, an idea that he said is much like the invention of the paper clip.
Trump proclaimed it’s the kind of idea where people might say, “Why the hell didn’t I think of that?”
Except it's not a brand-new idea at all. It's actually an early 1980s retread.
Once you examine how such a plan might work, it could be less attractive than many potential car buyers would imagine, too.
The GOP candidate for president didn’t give many more details on how such a plan could work or when car buyers might expect any kind of tax break. The theory is that it could boost car sales at a time when interest rates are high. Trump said the car loan deduction would stimulate domestic auto production and "make car ownership dramatically more affordable for millions and millions of working American families."
Yes, car loan rates would be coming down in the months ahead, if the Federal Reserve stays on a rate-cutting path as many expect. But car loan rates won't drop suddenly and could remain high for many people, especially if they don't have excellent credit.
I reached out to some experts to get an idea of how such a tax break — which would have to be approved by Congress — might work.
The No. 1 point to know: Many people aren't likely to benefit from this proposed deduction, even if they do take out a loan on their car and truck. It sort of sounds better than it really would likely turn out to be.
First, you most likely would need to itemize your deductions to get a tax break on car loan interest — and not take the standard deduction as the majority of people do today. The standard deduction became far more prevalent after the major tax changes in the Tax Cuts and Jobs Act of 2017 — the Trump tax cut initiative that expires at the end of 2025.
Think of a deduction on car loan interest like the deduction you get on interest on your home mortgage or your charitable deductions.
James Hines Jr., a University of Michigan professor of law and economics, said someone who itemizes deductions on their federal income tax return would be able to add a new deduction for car loan interest to the list, if the proposal became part of the tax law.
Taxpayers who itemize often take deductions for mortgage interest, charitable contributions, state and local taxes paid.
"Of course, you only get the benefit of interest deductibility if you itemize your deductions," said Hines, who also is the research director of the Office of Tax Policy Research in U-M's Stephen M. Ross School of Business.
The Tax Cuts and Jobs Act significantly raised the standard deduction and the amounts went up over the years, as they are indexed for inflation.
For married couples filing jointly, the standard deduction was $27,700 on 2023 federal income tax returns.
For single filers and married couples filing separately, the 2023 standard deduction was $13,850 on federal returns.
And the standard deduction was $20,800 for head of household, tax filers who are generally unmarried with one or more qualifying dependents.
Nearly 90% of taxpayers claim the standard deduction instead of itemizing deductions now, according to information online at TurboTax.
Back in 2017 before the major tax law change, 31% of all individual income tax returns had itemized deductions, compared with just 9% in 2020, according to the Tax Policy Center, a nonpartisan think tank in Washington, D.C.
"Since around 90% of taxpayers claim the standard deduction and do not itemize, those taxpayers may see no benefit from the additional interest deduction," said Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting in Riverwoods, Illinois.
For those taxpayers who could claim the interest deduction, Luscombe said, the tax savings would vary and depend on what tax bracket they fall into based on their income. The current top tax bracket is 37%.
So, unless there is some sort of special line-item deduction for car loan interest ahead, you wouldn't be able to claim a deduction on car loan interest unless you're part of a small group of people who itemize several deductions.
Hines noted that car loan interest payments — in fact, all interest expenses, including credit cards — were fully deductible prior to the Tax Reform Act of 1986. The 1986 Act limited interest expense deductibility to mortgage interest, as well as interest on home equity loans.
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"There is certainly a coherent case for making interest on car loans tax deductible," Hines said. "It is the same case as that for making any loan interest deductible."
If taxes are paid on the interest earned by the entity making the loan, Hines said, then someone who is borrowing and paying the interest theoretically should be able to offset the interest they paid from their taxable income.
"That is what an interest deduction does," Hines said.
And remember, you wouldn't be able to deduct your entire car payment. We're talking about deducting the interest.
Jonathan Smoke, chief economist for Cox Automotive, said car loans are amortized so that each payment covers interest and principal.
"At the beginning of the loan, more of the payment goes to interest, and by the end of the loan, more goes to principal," Smoke said. "Therefore, the maximum deduction would be in year one."
Smoke gave an example using a hypothetical loan assuming today’s average interest rate of 9.5%. And then assume a 72-month or six-year car loan, the most popular term.
If someone finances $42,000 — the average financed amount in September — the borrower would pay $768 a month.
The first year of interest would add up to $3,757 in this example, Smoke said.
For someone at a tax rate of 24%, that deduction would reduce taxes by roughly $900. But it's important to note that the deduction would decline in subsequent years of that car loan.
It's also key to note the dollar value of the deduction would be bigger for someone who makes more money and pays a higher tax rate. It would be smaller for someone who earns less money and pays a lower tax rate.
(This story was updated because an earlier version included an inaccuracy.)
Contact personal finance columnist Susan Tompor: stompor@freepress.com . Follow her on X (Twitter) @ tompor .
This article originally appeared on Detroit Free Press: Trump's proposed car loan deduction isn't as shiny as you'd think
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