VA funding fee deduction for home purchase

[julia922]

Can I deduct the FULL amount of the VA funding fee in 2020 as long as I closed on my house in 2020, even if the funding fee was rolled into my loan? The actual guidance is a bit vague, and nothing was included in Box 5 on my 1098. IRS Pub. 936 states "Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. If provided by the Rural Housing Service, it is commonly known as a guarantee fee. The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. These fees can be deducted fully in 2020 if the mortgage insurance contract was issued in 2020."

[vrbrandt]

Question :  Where can I enter this in Turbo Tax?

[JoannaB2 · Accepted solution]

Yes, the VA funding fee is fully deductible.  The VA funding fee is a payment paid on a home loan obtained through VA loan programs. The fee helps offset some of the costs of loans that would otherwise occur because VA loans allow lower credit score requirements and don't require down payments and monthly mortgage insurance. 

The PMI is reported on line 5 of 1098 Mortgage Interest Statement. 

See, changes to the deductibility of Mortgage Insurance Premium, link.

[julia922]

@JoannaB2 Thank you!

[CHUCKSIMP]

I do not see the reply for the question as to "Where in Turbo Tax do you enter the VA Funding fee deduction?"?

Is there an area in the 2020 Deluxe Edition ?

[MaryM428]

In TurboTax

• Federal
• Deductions and Credits
• Your home
• Mortgage Interest and Refinancing (Form 1098)
• At the screen Let's Get the Details from Your
• Enter the VA Funding Fee in Box 5-Mortgage Insurance Premiums

The VA Funding takes the place of the mortgage insurance.

@CHUCKSIMP

[Opus 17]

@CHUCKSIMP 

If you have a 1098 for your mortgage, you can add the VA funding fee to any amount already included in box 5 for mortgage insurance premiums. If you do not have a 1098, or if you prefer to keep things separate, you can create an imaginary 1098 in the name of the closing bank and only enter the VA funding fee in box 5 for mortgage insurance. Either way, it ends up in the same place on the tax return.

[brs10]

"You can treat amounts you paid during 2020 for qualified mortgage insurance as home mortgage interest."

"Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Home- owners Protection Act of 1998..."

If you can treat VA Funding Fee as interest, why would you enter it in box 5?

[Opus 17]

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@brs10 wrote:

"You can treat amounts you paid during 2020 for qualified mortgage insurance as home mortgage interest."

"Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Home- owners Protection Act of 1998..."

If you can treat VA Funding Fee as interest, why would you enter it in box 5?

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Because even though the law says that you can treat qualified mortgage insurance premiums as if it was deductible mortgage interest, the IRS has established a specific procedure for reporting these amounts.  On schedule A, deductible mortgage interest is reported on line 8a or 8b (depending on the kind of lender), deductible points (which are also a form of interest) are reported on line 8c, and mortgage insurance premiums are reported on line 8d.

https://www.irs.gov/pub/irs-pdf/f1040sa.pdf

And in turbotax, the way to get mortgage insurance, including the VA funding fee, to be reported on line 8d of schedule A is to list it in box 5 of the 1098.

If you add the VA funding fee to your interest in box 1, then your tax return won't match the IRS records of the 1098, and you will get a letter asking for an explanation.  

[brs10]

If TurboTax cannot determine that my insurance box 5 is in fact qualified and therefore fully deductible, how is that deduction accounted for?

 Is deducting VA Funding Fee still limited by income? 

[brs10]

...And thanks for your quick reply Opus

[prf44]

The VA funding fee is not fully deductible if your income exceeds $100,000 and if it exceeds 200,000 then the VA funding fee is not deductible.

[DoninGA]

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@prf44 wrote:

The VA funding fee is not fully deductible if your income exceeds $100,000 and if it exceeds 200,000 then the VA funding fee is not deductible.

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There is no income limit for deducting Mortgage Insurance Premiums on Schedule A.

IRS Schedule A Itemized Deductions page 9 - https://www.irs.gov/pub/irs-pdf/i1040sca.pdf#page=9

Mortgage insurance provided by the Department of Veterans Affairs and the Rural Housing Service is commonly known as a funding fee and guarantee fee, respectively. These fees can be deducted fully in 2020 if the mortgage insurance contract was issued in 2020.

[Opus 17]

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@prf44 wrote:

The VA funding fee is not fully deductible if your income exceeds $100,000 and if it exceeds 200,000 then the VA funding fee is not deductible.

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Not entirely correct.  The VA funding fee is considered a mortgage insurance premium.  All mortgage insurance premiums are subject to an income phase-out.  For 2020, the phase-out begins at an AGI of $100,000 ($50,000 if married filing separately) and ends at $109,000 ($54,500 if married filing separately).  Above $109,000, no mortgage insurance premiums are deductible due to the income limitation.

And for 2021, mortgage insurance premiums are not deductible for anyone, unless Congress changes the tax law again.

Also, the question was not about the income limitation, but whether it could be deducted even though the borrower didn't pay the premium directly because it was rolled into the loan.  For FHA MIP and for PMI (private mortgage insurance) the premium must be spread out over 84 months if it is not paid up front with cash, but the VA funding fee is fully deductible in the year of the mortgage even if it is rolled into the mortgage.