When candidates make policy proposals during the campaign, they often sound beneficial, but they don’t always hold up to closer scrutiny.

Vice President Kamala Harris and former President Donald Trump have both suggested eliminating tip taxes, which might sound appealing to service workers but could have unintended consequences and end up helping fewer people. That Brooking Institution points out that 37 percent of tipped workers don’t earn enough to pay federal income tax anyway, so this policy wouldn’t benefit them.

Another recent example is Trump’s suggestion during a speech at the Detroit Economic Club that his administration would make auto loan interest fully tax deductible.

On the surface, this kind of move looks like it would help people’s finances on a large scale, even more so than a niche issue like advice. In total, Americans have $1.63 trillion in auto loan debt from more than 100 million loans, according to the New York Fed.

However, depending on how the deduction is structured, it could be irrelevant to most and even hurt some.

“The devil is in the details,” he said Francine LipmanCPA and professor at UNLV’s William S. Boyd School of Law, specializing in tax law.

Standard Deduction vs. detailed deductions

While specialized tax deductions like this sound good, they’re hard to take advantage of in practical terms. That’s because many of these deductions can only be taken if you itemize, which means adding up all your tax-deductible expenses, such as state and local taxes, mortgage interest, and charitable contributions.

However, the standard deduction anyone can take for tax year 2024 — regardless of expenses or income — is $29,200 for married couples ($14,600 for singles). Unless your deductions itemized are higher than the standard deduction, it doesn’t make financial sense to itemize. You can’t have both – it’s one or the other – so roughly 90% of Americans take the standard deduction.

Meanwhile, for the roughly 10 percent of Americans who do detail, they tend to be very high-net-worth individuals who buy cars with cash rather than having to borrow money, Lipman said.

So while the car loan interest tax deduction might sound appealing, it probably wouldn’t change most people’s tax situation.

“This is another proposal that appears to be beneficial, but to anyone who understands the tax system, it’s actually misleading because it then makes someone think they’re getting a benefit they’re not,” Lipman said.

Many taxpayers “will think they’re getting a tax deduction, and so maybe they’ll be more inclined to finance a car … and so they’ll make bad economic decisions because they don’t really understand how that benefit, or lack thereof. it works,” she added.

Even if you were close to reaching the point where itemizing makes more sense than taking the standard deduction, and now deducting your car loan interest could put you over the limit, you won’t necessarily get the full benefit.

Let’s say you normally had $28,000 in itemized deductions, so you would instead take the standard deduction for married couples at $29,200. If you also had $2,000 in car loan interest to add to your itemized amount, you would have $30,000 in deductions and thus itemize.

However, you only get $800 more in deductions, not the full $2,000 in auto loan interest, based on the difference between the itemized and standard deductions. Of that $800, you only save a fraction because it’s a tax deduction, not a credit—at a 20% tax rate, you’d save $160.

“It’s such a marginal difference that pushing people toward an auto loan” is often not in their best interest, Lipman said.

An exception might be if a law ends up being written in a way that allows the tax deduction to be taken as a so-called above-the-line adjustment, which essentially allows the deduction to be taken in addition to the standard deduction. However, the Trump campaign has not elaborated on that, and historical precedent shows it is unlikely to happen.

First, personal interest – including car loan interest – was tax deductible only for those who itemized, but Tax Reform Act of 1986 under former President Ronald Reagan got rid of that deduction, in part because most people take the standard deduction anyway.

During Trump’s presidency, Tax Cut and Jobs Act of 2017 increased the standard deduction and reduced many deductions that were eligible for itemizing, so it would be a departure from his and other Republicans’ tax policies to create an above-the-line adjustment for auto loan interest.

Even though the law allows an over-the-line deduction, it may not be worth it for many Americans either, as it could create the risk of someone taking out a car loan at the expense of their finances.

The risk of chasing a tax break

Trump, pitching to union members and working-class voters, suggested that deductible interest on auto loans would boost the industry. However, this would likely be based on more people buying new cars or increasing the frequency of new car purchases, which is not necessarily something most people can afford.

“Even if the interest is deductible, you still pay the interest, it’s just deductible at your rate. tax,’ so you’re effectively only getting a portion of that money back, said Jason Runung, CFP, senior financial advisor, VP at Summit Wealth Group.

For example, if you paid $10,000 in interest and your effective tax rate is 20%, that means you’re only getting $2,000 in tax savings while still paying $8,000 more than you would if you didn’t have the top-up. interest, he said.

While some might say that buying a new car would have happened anyway, so you might as well get the tax break, the reality is that people often mistake financial ‘wants’ for financial ‘needs’. Chances are, you could get by with a much less expensive car that you can buy outright instead of going into debt for it.

In general, car payments “should be no more than 10 percent of your monthly budget,” Runung said. You should also crunch the numbers, regardless of the percentage of your budget, to make sure you’re not overextending yourself with debt, he added.

Plus, with cars, taking out a loan usually means you lose money. First, interest rates are usually higher than they are for assets like houses. Keeping your mortgage debt low can allow you to earn more cash than if you paid off that debt quickly, but it’s harder to do the same with your car loan debt. Worse, cars usually lose value quickly, so once you’ve paid off the loan, you may not have much to show for it, compared to a house that you can often sell for more than you paid for .

A car “is a depreciating asset,” Runung said. “They tend to drop the price quite aggressively.”

So even with a tax break, it might cost you more in the long run than if you were more conservative with your car spending and instead focused on growing your savings and investments.