Is the VA Funding Fee Tax Deductible?

What Is the VA Funding Fee?

The VA funding fee is a payment paid on a home loan obtained through VA loan programs. The fee is paid by the person taking out the loan.

The fee helps offset some of the costs of loans that would otherwise occur because VA loans allow lower credit score requirements, don't typically require down payments and don't require monthly mortgage insurance.

Is the VA Funding Fee Tax Deductible?

You may be able to deduct the VA funding fee from your annual income tax payment. If you qualify, you can enter the total amount you paid over $600 for the year in box 5 of IRS Form 1098.

If you choose to pay the fee as part of your mortgage payments, you can only deduct the amount you paid that year.

How Do You Claim the VA Funding Fee on Taxes?

To claim the VA funding fee, you need proof that you paid it. Usually, a closing statement is used as proof of payment if you make the payment all at once when you take out the loan. You may also get a statement from your mortgage lender detailing how much you paid for the fee each year.

The process of claiming the funding fee is similar to deducting other forms of mortgage insurance. You'll need to enter the amount on the appropriate location on your tax return. Tax software programs usually help you understand how to enter this information, and a tax professional can also provide assistance. 

Is the VA Funding Fee Refund Taxable?

In some cases, the VA funding fee is refunded. This happens when someone pays the fee but it's later deemed that they were eligible not to pay it.

If you didn’t claim the funding fee as a deduction on your taxes, the refund should not be counted as taxable income. On the other hand, if you did deduct the fee from your taxes, the refund should be reported as taxable income. This is because you reduced your taxable income by the fee. If you received a refund, you didn't actually reduce that income; reporting the fee as income offsets that issue.   

Do You Have to Pay the VA Funding Fee?

There are some exemptions to the funding fee. Based on different factors, you may pay a lower fee or not pay one at all. Veterans disabled during service will often not have to pay the fee. Whereas Reservists and National Guard members may pay a higher fee than regular military members. There are many stipulations with VA funding fees, so whether or not you have to pay it and how much it is depends on your personal situation.