New or used? Trump's tax break changes the math for car buyers.

USA Today

6 hours ago

For value-minded consumers, used cars are generally considered a better deal than new cars.
Does the new Trump tax break change that equation?
The One Big Beautiful Bill Act promises 'No Tax on Car Loan Interest.' It's one of several novel tax cuts in the new law.
Here's what the 'no tax' provision actually means: Between now and 2028, car buyers may deduct the interest they pay on new car loans. The tax break goes away in 2029.
There are several caveats. Among them:
President Donald Trump tailored the tax break to reward automakers for building vehicles in America, and consumers for buying them.
Is the 'Big Beautiful' tax break a game-changer?
Is the new deduction big enough to change the dynamics of the car marketplace?
Probably not, experts say.
'It may very slightly privilege the vehicles that are built domestically,' said Sean Tucker, lead editor at Kelley Blue Book. 'But in the end, we don't think this will have too much of an impact. It's just not a big number, and it's not going to be around for a while.'
First of all, let's make this clear: The tax break is a deduction, not a credit.
Tax credits reduce how much tax you owe: A $10,000 tax credit lowers your tax bill by $10,000.
Tax deductions reduce your taxable income. If you're paying a 22% tax rate, a $10,000 deduction lowers your tax bill by $2,200.
'The $10,000 sounds really, really good, but the final number on the tax savings will be a surprise for a lot of taxpayers,' said Miklos Ringbauer, a CPA in Southern California.
In practice, few taxpayers are likely to ring up anywhere near $10,000 in deductible interest on a new-car loan, according to auto-industry experts.
Consumer Reports estimates the average buyer might save about $500 a year with the new tax break, 'which isn't nothing,' said Keith Barry, senior autos reporter. 'But the difference in cost between a new car and a used one could easily be in the thousands of dollars.'
A $23k price gap separates new and used cars
The average new car sold for $48,907 in June, according to Kelley Blue Book. The average used car listed for $25,512 in early July. The price difference works out to just over $23,000.
All else being equal, that figure – $23,000 – is how much you'd have to save from the new tax deduction to make a new car a better deal than a used one.
'We're finding that on the average loan now, the buyer's paying about $2,000 a year in interest,' Tucker said. The new tax break, he said, 'would save them about $400.'
With $400 in annual savings, it would take about 58 years to save $23,000 on a new car loan. Car loans are getting longer, but not that long.
Of course, there are good reasons why new cars cost more than used ones. A new car is likely to last longer than a used vehicle. New cars often have generous warranties. Repair costs rise with the age of the vehicle.
New car buyers pay a premium
Car buyers pay an inordinate premium for new vehicles. An old axiom holds that a new car loses $1,000 in value when you drive it off the lot.
That figure is hopelessly dated, given the rising cost of new cars. In fractional terms, new vehicles lose at least 10% of their value on the first day you own them, and 10% to 15% percent of value per year after that, according to Bankrate.
Another perk for new car buyers: New-car loans tend to carry lower interest rates than used-car loans. The average annual percentage rate in June was 10.9% for used vehicles, 7.3% for new ones, according to Edmunds.
Because borrowing costs are lower for new cars, a tax deduction on the interest might be less meaningful on those transactions, car experts say.
However, the tax break could prove useful for new-car buyers with lower credit scores, because they tend to pay higher interest rates.
'It actually helps the people in the most need,' said Ivan Drury, director of insights at Edmunds. 'If you are repairing your credit, if you have tarnished credit, if you have no credit, this stands to benefit you the most.'
How to determine if a car was 'made in USA'
Trump's new-car tax break may not be a game-changer, analysts say, but it could nudge some new-car buyers toward vehicles assembled in the United States.
Roughly half of new vehicles sold in the United States last month were manufactured in this country, Drury said.
To qualify for the deduction, a car or truck must have its 'final assembly' in the United States. That information is listed on a vehicle information label, generally affixed to the car window at the dealership. A federal VIN Decoder can also tell you where a vehicle was assembled.
Don't assume 'imports' are built in other countries. Many are assembled in U.S. plants. And many 'American' cars are assembled abroad.
If you walk into a new car showroom any time soon, the sales staff will probably have the information at their fingertips.
'Is the dealer going to talk this up?' Drury said. 'You'd better believe it.'