Car Loan Interest Deduction 2025 for Retirees and Tax Planning Tips 

When the One Big, Beautiful Bill became law in 2025, much of the attention focused on its impact on tax brackets and estate exemptions. While those headline changes shaped early conversations, the legislation also introduced smaller, lesser-known provisions that may be especially important for pre-retirees. 

One of those is a temporary deduction for interest paid on certain car loans. Although this deduction will not apply to everyone, it could benefit households that plan to make a large purchase such as a vehicle before retiring. For many, buying a car ahead of retirement is a practical step to avoid carrying new debt into later years. Understanding how this deduction works can help place that decision within a broader retirement strategy. 

What Changed Under OBBBA  

Beginning in 2025 and running through 2028, eligible taxpayers may deduct up to $10,000 in interest on qualifying car loans. However, the deduction comes with income thresholds and specific vehicle requirements. 

The benefit phases out once modified adjusted gross income reaches $100,000 for single filers or $200,000 for joint filers. The loan must be for a new vehicle purchased for personal use, not business or commercial purposes. In addition, the vehicle must have its final assembly completed in the United States. 
 
To claim the deduction, taxpayers will need to include the vehicle identification number (VIN) on their tax return. Lenders must also report interest amounts received, adding another layer of documentation. The IRS outlines these eligibility requirements in its explanation of the One Big, Beautiful Bill.  

Eligibility Considerations  

This deduction does not apply to used vehicles, leased cars, or loans taken for business purposes. It is strictly for new, personal-use vehicles that meet the law’s qualifications. Given these parameters, it is essential to confirm that the purchase and loan meet the criteria before factoring the deduction into your retirement plan. 

This provision may be particularly relevant for households planning to purchase a vehicle before stepping away from full-time employment. Buying a car while still earning income can be easier to manage financially and may align better with cash flow goals in early retirement. 

Why It Matters for Pre-Retirees  

For many people approaching retirement, the years before stepping away from work often include large purchases and significant financial decisions. Car loans during this phase may overlap with the start of Social Security benefits, required minimum distributions, or Medicare enrollment. 

In those cases, taxable income may rise from multiple sources in a short window. The car loan interest deduction may help lower total taxable income during those years, which in turn can influence how other retirement benefits are taxed or calculated. Required minimum distributions are one example of how this interaction can shape your broader strategy. 

The deduction also complements other short-term provisions introduced under the One Big, Beautiful Bill, including tip income, overtime pay, and additional benefits for seniors. Together, they offer more flexibility in managing income at a critical life stage. 

Planning Considerations  

If you are thinking about buying a car in the years leading up to retirement, it may help to look at how the purchase lines up with other financial milestones. Buying before required minimum distributions or Medicare enrollment could shift how your income appears for that year. 

This deduction also works in combination with other temporary provisions introduced by the One Big, Beautiful Bill, such as the deductions for tip income, overtime pay, and seniors. Together, they create a short window where multiple types of income can be managed in new ways. 

Accurate records will matter, since the IRS requires the vehicle identification number on your return and lenders must report the interest they receive. Taking the time to confirm eligibility and document the loan correctly can make the difference between a missed opportunity and a valuable deduction. 

In the end, the car loan deduction is just one part of the broader retirement tax picture. Looking at it in the context of your overall plan may give it more meaning than treating it as a standalone benefit. 

Conclusion   

The car loan interest deduction is one of the lesser-known parts of the One, Big, Beautiful Bill. It is temporary, available only from 2025 through 2028, and it is easy to miss among the larger tax changes. For pre-retirees, it may matter when a vehicle purchase overlaps with other retirement income decisions.  

To learn more about this and other provisions, download our free guide, 4 Hidden Deductions in the One Big, Beautiful Bill Every Pre-Retiree Should Know. If you have questions about how these deductions might relate to your own planning, our team is available to talk through the details.  

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This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.   

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Investment advisory services are offered through Liberty Wealth Management, LLC (“LWM”), DBA Liberty Group, an SEC-registered investment adviser.  For additional information on LWM or its investment professionals, please visit www.adviserinfo.sec.gov  or contact us directly at 411 30^th Street, 2^nd Floor, Oakland, CA  94609, T: 510-658-1880, F: 510-658-1886,  www.libertygroupllc.com. Registration with the U.S. Securities and Exchange Commission or any state securities authority does not imply a certain level of skill or training.  

References  

IRS. (July 14, 2025). One, Big, Beautiful Bill Act: Tax deductions for working Americans and seniors. https://www.irs.gov/newsroom/one-big-beautiful-bill-act-tax-deductions-for-working-americans-and-seniors