Refunded VA funding fees

[CJTurner]

Recently received a refund from the VA for funding fees due to a disability claim that was originally filed prior to closing 7 years ago. I would like to know if part of this money counts as income that will need to be filed or is this tax free income? I plan on paying toward principle of the mortgage but would like to set taxable amount aside if necessary. 

[maglib]

If you had used those fees as itemized deductions in the year you took out the loan then those fees would now be considered income if you had received any taxable benefit for the deduction. The VA loan funding fee was entirely tax deductible. Since it is a form of mortgage insurance, you could have taken entire amount you pay as a deduction on your annual income taxes.  

So if you had itemized and received a tax benefit for VA funding fees in the year, then yes they would be includable as income.  If you had taken a standard deduction that year, then NO they would not be.  To ascertain the tax benefit you would have to go back to the year of the loan and recalculate your return and see if the entire amount benefitted you.  

[Pentaborane5]

So, if the fee was used as an itemized deduction in the year it was paid, what's the burden?  Shouldn't it just be to file an amended return for that year (removing the deducted amount and paying the difference) vice paying tax on (all) the refunded amount as income in the year it was received?   How does one calculate and explain it?

[VictoriaD75]

For individuals, taxes are completed based on transactions in the year incurred, such as the year the cash is paid or the year cash is received. For example, if you took a deduction is tax year 2012 and received a refund in 2019, you would leave the deduction in 2012 and claim income separately in 2019. You must claim it as income in the year received because you received a tax benefit on the deduction in a prior year. To enter this in TurboTax Online, follow the following steps:

1. Under Federal, click on Wages & Income
2. Expand the options in Less Common Income, and click Start/Revisit next to Miscellaneous Income
3. Next to Other reportable income, click Start/Revisit
4. Answer Yes to the question Any Other Taxable Income
5. Enter a description and the corresponding dollar amount and click Continue
6. Click Done

You will find this income reported on line 8 of Schedule 1 and carried over onto the 1040 on line 7a. This gets added to all other income on your return and taxed at the ordinary income rate for your filing status and income level.