Filing Your Income Taxes
Available to military service members and veterans as well as spouses in some situations, a Department of Veterans Affairs home loan offers some special benefits whether you're buying or refinancing. You can often avoid a down payment, get approved with more lenient credit standards and avoid private mortgage insurance. However, this type of home loan comes with a VA funding fee for many borrowers alongside the mortgage interest and any points you pay.
The good news is such costs are usually tax-deductible as long as you meet some requirements and itemize. So read on to learn about what you can deduct for your loan and home and what steps you'll need to take.
Understanding the VA Funding Fee
What sets apart VA loans from other types of home mortgages is the special VA funding fee that you'll usually pay to help offset the additional risk the VA takes on for not making you pay PMI or put down a hefty sum. The VA does exclude some borrowers from the fee in situations such as when you're dealing with a service-connected disability, losing your spouse from such a disability or receiving a Purple Heart for your service. Otherwise, the VA will let you either pay the funding fee with your closing costs or spread it throughout your loan term.
As of publication, VA funding fees vary by type of loan, the number of times you've used VA loans and your down payment amount, and they range from 0.5 percent to 3.6 percent. For example, if you bought a $200,000 first home with no down payment, that funding fee would be 2.3 percent, meaning $4,600. On the other hand, if you've used a VA loan before and are putting down 5 percent for a home of the same price (ending up with a $190,000 loan), you'd have a 1.65 percent funding fee that totals $3,135. This means you can incur a significant expense, especially if you pay it all at closing.
VA Funding Fee Tax Deduction
Although the VA funding fee is not called PMI, it serves a similar purpose. So, it's considered deductible as mortgage insurance on your tax return per IRS rules for people who itemize. Under the current tax laws, these rules will apply for getting your tax deduction:
- Adjusted gross income limits: There's a $50,000 (married filing separately) or $100,000 (all other filing statuses) AGI ceiling for deducting the whole VA funding fee paid, where you'll see limited deductions up to $54,500 (married filing separately) or $109,000 (all other filing statuses). The IRS Schedule A instructions give you a worksheet to calculate the deductible portion if you fall in the latter category.
- Loan date and purpose: Like all taxpayers taking the mortgage insurance deduction, your home loan needs to have originated on Jan. 1, 2007, or later. You also need to be personally liable for the loan with the property serving as the security.
- Allocation allowed: When your VA funding fee is part of your closing costs and paid at once, you're able to deduct up to the whole amount depending on your AGI. Otherwise, you'll get to deduct the portion paid annually per your loan's terms and may need to contact your lender to get the exact amount that's tax-deductible.
Read More: Do Closing Costs Go Toward Home Purchase Prices?
Considering Other Related Deductible Costs
While the VA funding fee is the primary loan fee, that's not all you can deduct related to your VA loan and home. Here are some more itemized deductions along with their requirements:
- Mortgage interest deduction: The interest portion of your mortgage payments during the tax year qualify you for a tax deduction within certain mortgage debt limits. For example, if you took the loan out before Dec. 16, 2017, the deductible interest is allowed for up to a $500,000 (married filing separately) or $1 million loan (all other filing statuses). For later loans, the limits on mortgage debt drop to $375,000 (married filing separately) or $750,000 (all other filing statuses). There's a special exception for people still paying loans from before Oct. 14, 1987: they don't have a mortgage limit at all.
- Discount point deduction: When you take out a VA loan, you might purchase discount points to help you get a lower interest rate and thus save money over the whole term. Such points are also tax-deductible since the IRS considers them prepaid interest, and they may be allocated over the loan's term or deducted at once depending on your loan situation. For example, VA cash-out refinance loans usually require the allocation over time, while a regular loan for a home purchase may allow for the full deduction in one tax year.
- Property tax deduction: Alongside the loan costs, you can deduct as much as $5,000 (married filing separately) or $10,000 (all others) in property taxes you pay each year. This requires that you use your home as a personal residence and own it. Further, the limits shown apply to property taxes along with other state and local taxes as a whole.
Preparing for Home Tax Deductions
To deduct your VA loan fees and other home-related costs, you'll need to find some documentation. You can locate your mortgage interest (box 1), points (box 6) and VA funding fee (box 5) on IRS Form 1098 (Mortgage Interest Statement) that your lender has to send unless you've paid under $600 in interest for the tax year. Your lender can provide the information if you don't receive this form or have questions about the amounts. You'll find your property taxes paid on your end-of-year mortgage statement or contact your local tax assessor's office to get a copy of the year's tax payments.
With this documentation in hand, add up the deductible loan and home expenses to see what the total looks like and consider whether you qualify for some other itemized deductions available on Schedule A. You'll then want to compare the possible itemized deduction amount to the standard deduction to see which gets you the better deal.
For example, if you end up with $15,000 in itemized deductions, that's a better deal in 2020 than the $12,400 standard deduction available for a single taxpayer. However, it's much worse than the $24,800 available if you're married filing jointly. So, whether to move forward taking these tax deductions will depend on your overall tax situation.
Deducting VA Loan and Home Costs
To report deductions for the VA funding fee, mortgage interest, property taxes and points, take a look at the second and third sections of Schedule A that are named "Taxes You Paid" and "Interest You Paid." You'll follow these steps to proceed:
- Use line 5b to report your real estate taxes paid up to the maximum allowed.
- Use line 8a on Schedule A to report your mortgage interest plus points combined. This means adding the numbers from box 1 and box 6 on your Form 1098 and seeing the special instructions if the VA loan you took out on your home was used for more than the home purchase or improvements (such as using a VA cash-out refinance loan partly for paying off other debts). Keep in mind the maximum loan limits as well since interest after that point isn't deductible.
- Use line 8b and line 8c if you didn't get a 1098 form showing the interest and points and follow the same instructions as above to report those expenses.
- Use line 8d to put the VA funding fee amount that your lender reports for the year.
After filling in this information related to your VA loan and your home, you can go through the other sections and lines to take any other itemized deductions available, and the Schedule A instructions provide further details on each line item. At the end of each section, you'll total up deductions by category, and you'll get your total amount to put as your itemized deductions on line 17. Reporting this final figure just requires writing it on line 9 on your Form 1040.
- USAA: VA Loan Information
- U.S. Department of Veterans Affairs: VA Funding Fee and Loan Closing Costs
- Veterans United Home Loans: Homeownership & Taxes
- IRS: Publication 936 (2019), Home Mortgage Interest Deduction
- Investopedia: Property Tax Deduction
- IRS: Schedule A
- IRS: Form 1098
- NerdWallet: Standard Tax Deduction: How Much It Is in 2020-2021 and When to Take It
- IRS: Schedule A Instructions
- IRS: Form 1040
- U.S. Department of Veterans Affairs: VA Home Loan Types
Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.