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:
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.