Available to military service members and veterans as well as their 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. But this type of home loan comes with a VA funding fee for many borrowers along with the mortgage interest and any points you pay.
The good news is that such costs are usually tax deductible if you meet some requirements and you itemize your deductions on your tax return.
What sets VA loans apart from other types of home mortgages is the special VA funding fee you'll usually pay. The fee helps to offset the additional risk the VA is taking on by not making you pay PMI or put down a hefty down payment.
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 out through the term of your loan.
VA funding fees vary by type of loan, the number of times you've used VA loans and your down payment amount. They range from .5 percent to 3.6 percent. Your funding fee would be 2.3 percent if you bought a $200,000 first home with no down payment, or $4,600. But you'd have a 1.65 percent funding fee if you've used a VA loan before and you're putting 5 percent down on a home of the same price. You'd end up with a $190,000 loan in this case after subtracting your down payment. Your funding fee would work out to $3,135.
You can incur a significant expense, especially if you pay it all at closing.
The VA funding fee is not called PMI, but it serves a similar purpose so it's deductible as mortgage insurance on your tax return per IRS rules if you itemize your deductions. These rules apply for claiming a tax deduction as of 2021, the tax year for which you'll file a return in 2022.
The VA funding fee is the primary loan fee, but that's not the only expense you can deduct that's related to your VA loan and home.
You'll need some documentation to deduct your VA loan fees and other home-related costs. You can locate your mortgage interest (box 1), points (box 6) and VA funding fee (box 5) on IRS Form 1098 (the Mortgage Interest Statement) that your lender must send you 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 you can contact your local tax assessor's office to get a copy of the year's tax payments.
Add up the deductible loan and home expenses to see what the total looks like. Consider whether you qualify for any other itemized deductions available on Schedule A. You'll then want to compare the total of your itemized deductions to the standard deduction you're entitled to claim for your filing status to see which shaves the most off your taxable income.
If you have $15,000 in itemized deductions, that's a better deal than the $12,550 standard deduction available to a single taxpayer in tax year 2021. But it's much less than the $25,100 standard deduction you could claim if you're married and filing jointly in the same tax year. Whether to move forward with taking itemized deductions will depend on your overall tax situation.
Take a look at the second and third sections of Schedule A to report deductions for the VA funding fee, mortgage interest, property taxes and points. These sections are labeled "Taxes You Paid" and "Interest You Paid." Follow these steps to proceed:
You can go through the other sections and lines to claim any other itemized deductions that are available and that you qualify for after filling in this information related to your VA loan and your home. The Schedule A instructions provide further details on each line item.
Total up deductions by category at the end of each section. You'll arrive at the total amount of your itemized deductions on line 17. Transfer this final figure to line 12a on your 2021 Form 1040 tax return.
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.
