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If You Get the VA Funding Fee Refunded, Do You Pay Taxes on It?

Taxes Veterans Benefits

VA loans are pretty cool. You can buy a house without a down payment. There is one downside though, paying the VA Funding Fee (more on the VA Funding Fee here). There are some tax consequences that come with the Funding Fee.

Deducting the VA Funding Fee

The VA funding fee is essentially Private Mortgage Insurance (PMI). And currently PMI is tax deductible (through 2021 as of this writing). Unlike other forms of PMI, all of the VA Funding Fee, even though you're paying for future years, can be deducted in the year it is paid. For the other types of PMI, the payment must be allocated over the term of the loan or 84 months (whichever is shorter), if the payment includes periods after the end of the year.

The ability to deduct the Funding Fee phases out as income increases. The phase-out starts at $100,000 of Adjusted Gross Income (AGI) and is completely phased out by $109,000 AGI. If you file Married Filing Separately (MFS) the amounts are cut in half. Like a few other places in the tax code, the AGI phase-outs are the same for Single taxpayers as those MFJ. So, if your income is above the phase-out limit, you won't get to deduct the VA Funding Fee. Unfortunately, most retired Senior Military Officers and NCOs won't get to take the deduction, if they have a second career.

Tax Consequences if the VA Funding Fee is Refunded

Under certain circumstances the VA Funding Fee can be refunded (read more here). If that happens, how does that affect you? It depends. If you took the deduction, then you'll have to declare it as income. If you were unable to deduct the Funding Fee, then you don't have to declare the refund as income.

Military Finances are Complicated

Your finances and taxes are not the same as civilians are. That's why we think you should work with a financial advisor that works with active and retired military members and their financial issues each and every day. If you'd like to chat, give us a call or sign up for a free initial consultation below.


If you found this article useful, you might like the following blog posts:

VA Education Benefits for Spouses and Kids


Is VA Long-Term Care a Replacement for Long-Term Care Insurance?


Can the VA Reduce My Disability Rating?



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