Yes, the VA funding fee is tax deductible for veterans, service members, and surviving spouses who itemize on Schedule A. The One, Big, Beautiful Bill Act, signed July 4, 2025, reinstated the deduction after it had lapsed at the end of 2021, so borrowers who close on VA-guaranteed loans in 2026 and later can once again claim the fee as qualified residence interest.1VA News. Home Loan Borrowers Can Now Deduct Funding Fees Borrowers who closed VA loans during 2022 through mid-2025 fell into a gap when the provision was not in effect.
The fee itself runs from 1.25% to 3.3% of the loan amount depending on down payment, prior VA loan use, and whether the loan is a purchase or refinance,2Veterans Affairs. VA Funding Fee and Loan Closing Costs so on a mid-sized home loan the deduction can be worth thousands of dollars in the year you close.
Why the Fee Is Deductible (and Not as Points)
The legal basis matters because it changes how you report the fee. The VA funding fee is not deductible as points or prepaid interest. IRS Publication 936 explicitly lists VA funding fees alongside appraisal and notary fees as service charges that cannot be treated as points.3Internal Revenue Service. Publication 936 (2025), Home Mortgage Interest Deduction
Instead, the fee is deductible under the qualified mortgage insurance provision of the Internal Revenue Code, which treats insurance provided by the Department of Veterans Affairs, the FHA, and private mortgage insurers as residence interest.4Office of the Law Revision Counsel. 26 USC 163 – Interest When you pay the VA funding fee, it is treated as qualified residence interest for purposes of the mortgage interest deduction. The distinction is more than academic: the amortization rules for points do not control how you deduct the funding fee.
You Have to Itemize
The funding fee produces a tax benefit only if you itemize on Schedule A. If you take the standard deduction, the fee saves you nothing on your federal return no matter how large it was. For 2026, the standard deduction is $32,200 for married couples filing jointly and $16,100 for single filers.5Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
The funding fee on its own rarely gets you across that threshold. Combined with a full year of mortgage interest, property taxes, state income taxes, and charitable contributions, many VA borrowers do clear it, especially in the year of purchase when interest is highest and the fee is added to the pile.
How to Report It on Schedule A
Your primary source document is the Closing Disclosure, which lists the funding fee as a separate line item under loan costs. That is the figure you report.6Internal Revenue Service. About Schedule A (Form 1040), Itemized Deductions Keep the Closing Disclosure with your tax records; if you financed the fee into the loan balance, it still shows the full amount you paid.
Your lender’s annual Form 1098 may or may not include the funding fee. Some lenders report it in Box 6 (points paid on purchase of a principal residence), but many do not, because the fee is paid to the VA rather than to the lender. If Box 6 is blank or does not include the fee, use the amount from your Closing Disclosure. For the 2025 tax year, points not reported on Form 1098 were entered on line 8c of Schedule A.7Internal Revenue Service. Instructions for Schedule A (Form 1040) (2025) The IRS may update line assignments for 2026 to reflect the reinstated mortgage insurance deduction, so check the current year’s Schedule A instructions before filing.
Check Whether You Owe the Fee at All
Not every VA borrower pays the funding fee, which means not every borrower has one to deduct. You owe nothing if any of the following applies:2Veterans Affairs. VA Funding Fee and Loan Closing Costs
- You are a veteran receiving VA compensation for a service-connected disability.
- You are an active-duty service member who has been awarded the Purple Heart, with evidence of the award presented on or before closing. If you are discharged before closing, the exemption no longer applies and a new Certificate of Eligibility is required.8Veterans Benefits Administration. Updated Guidance for Blue Water Navy Vietnam Veterans Act of 2019
- You are the surviving spouse of a veteran who died from a service-connected disability and are receiving Dependency and Indemnity Compensation.9Veterans Benefits Administration. Circular 26-23-19 – VA Funding Fee Exemption and Refund Procedures for Lenders
Refunds When a Disability Rating Comes Later
If you paid the fee and later receive a VA disability rating with an effective date before your loan closing, you may qualify for a full refund. The effective date of your compensation must be retroactive to before the closing date; a rating awarded after closing without retroactive effect does not qualify.2Veterans Affairs. VA Funding Fee and Loan Closing Costs To request a refund, call the VA regional loan center at 877-827-3702, Monday through Friday, 8:00 a.m. to 6:00 p.m. ET.
A refund has a tax consequence if you already deducted the fee. Because the refunded amount is no longer a cost you paid, you may need to file an amended return for the year you claimed the deduction.
Open Questions for 2026 Filings
Three details about the reinstated deduction had not been fully clarified in updated IRS publications as of the file’s information, and each could affect how much you actually save.
The first is the income phase-out. Under the pre-2022 version of the mortgage insurance deduction, the amount you could deduct was reduced by 10% for each $1,000 your adjusted gross income exceeded $100,000, eliminating the deduction entirely at $110,000 AGI.4Office of the Law Revision Counsel. 26 USC 163 – Interest Whether the OBBBA modified or removed that threshold has not yet been fully detailed. Veterans with AGI above $100,000 should check the IRS’s OBBBA guidance at IRS.gov/OBBB before filing.
The second is refinance treatment. IRS rules for points paid on a refinance require amortization over the new loan’s term rather than a full first-year deduction.10Internal Revenue Service. Topic No. 504, Home Mortgage Points Because the VA funding fee is not classified as points, that amortization rule does not directly control. But IRS guidance on how to report the fee on a VA refinance under the reinstated mortgage insurance provision has not yet been detailed in a 2026-specific publication. If you close an Interest Rate Reduction Refinancing Loan, check the updated Publication 936 or consult a tax professional before filing.
The third is the new high-earner limit. The OBBBA introduced a cap on itemized deductions for taxpayers in the 37% bracket, which for 2026 begins at $640,601 for single filers and $768,701 for married couples filing jointly.11Tax Foundation. 2026 Tax Brackets and Federal Income Tax Rates Above those thresholds, the tax benefit of each dollar of itemized deductions is limited to roughly 35 cents instead of 37 cents. The effect on a funding fee deduction is modest, but it exists.