I’ll get straight to the point to save you time. Only around 10% of tax filers itemize when filing. There is no need to read this post if you take the standard deduction when you file your tax return because you cannot itemize deductions and take the standard deduction.
Use the graphic below for a flash review of how tax deductions work.
Those who do itemize are higher-income earners.
Former President Trump has suggested that he will allow car loan interest to be deductible. As you now know, this proposal will have no impact on 90% of tax filers. However, loopholes already exist, allowing filers who do itemize to deduct auto loan interest.
How to Deduct Auto Loan Interest Now
Business Owners
If you use your car for business purposes, the situation changes. You can deduct the portion of the interest corresponding to the business use of the vehicle. This requires meticulous record-keeping, including logs of mileage used for business and the total mileage for the year.
Using a Home Equity Line of Credit (HELOC)
One interesting approach to deducting your car loan interest is through a Home Equity Line of Credit, or HELOC. If you use a HELOC to finance your car purchase, the interest you pay can potentially be deducted as mortgage interest.
As of October 8th, 2024, the average rate of a HELOC loan was 8.94%.
Compare this to the average auto loan rates listed below at the conclusion of the second quarter of 2024, based on credit scores. As you compare these rates to HELOC rates, remember that the HELOC rates are deductible if you fall within the 10% of folks who itemize.
Average Auto Loan Interest Rates by Credit Score
Here are the steps you should consider if going this route:
Evaluate Your Equity: Ensure you have enough home equity to cover the purchase of your vehicle.
Compare Rates: Often, HELOC rates are lower than auto loan rates, but this can vary.
Consider Risks: Remember, your home secures the HELOC. Failure to make payments could put your home at risk.
Consult a Tax Professional: Before proceeding, discuss your specific situation with a tax advisor to ensure this method makes sense for you.
Wrapping it Up
Borrowing to purchase a vehicle is a personal decision. However, I am a big believer in paying cash if you have the means.
A financial argument can be made if you can earn more from a savings account than you would pay in interest, at least for those who have the discipline and know-how to use both. Under those circumstances, and if you don’t take the standard deduction, it can be worthwhile to investigate using a HELOC to finance your automobile.
Always consult with a tax professional to understand the implications and ensure compliance with IRS regulations. This strategy is not for everyone, but with informed decision-making, it can be a beneficial financial move.
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