VA Funding Fee (IRS bill for back taxes from 2009)

I deducted my VA funding fee of $8,085.00 back when I completed my 2009 tax return based on Q&A on turbotax that it was tax deductible since it was essentially prepaid mortgage insurance.  The IRS bill I got today indicates my mortgage insurance deduction on my 2009 return was $8,085.00, but the IRS corrected it to $0.00. Now I owe $4,221 in back taxes.   I checked with my mortgage company (chase), their policy is NOT to put VA funding fees on the 1098, just if you have regular mortgage insurance (that's probably the reason the IRS has no record of it).  Is/was the VA funding fee deductible?
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    I finally 100% confirmed that the VA funding fee was deductible for 2009.  After going back & forth with the IRS thru letters/faxes quoting IRS publication 936 for 2009, the IRS now indicates the issue is settled and I owe $0.00 taxes for 2009.  I also sent them a copy of the HUD-1 showing the VA funding fee paid. It seems the confusion is attributed to a few things:  1)  The deductibility of the VA funding fee is relatively new (was not deductible until tax year 2007), 2)  No organization was specifically directed by the IRS to put it on a 1098 or any other tax document when it became deductible (the funding fee was not paid to my mortgage issuer (Chase Bank); since the fee was not paid to them they refused to include it on a corrected 1098.  It was paid to the VA, but the VA indicated thru an e-mail to me that they do not issue 1098's.  This complicated the issue because there was no actual "tax" document to show the fee paid.  I just had a non-tax document, the HUD-1 from my home loan closing).  The IRS finally accepted the deduction after the HUD-1 and 936 references were sent to them (along with copies of the replies from both Chase Bank & the VA).  Whew!
    • I'm doing my 2012 taxes now, bought a home with a VA loan in 2012.  The 1098 from the lendor is showing the amount for the VA Funding Fee as PMI.  Question I have is, since my VA Funding Fee was included with the loan amount and not paid upfront, can I still deduct it?
    • My VA funding fee was not paid upfront, but was included in my loan amount and the full deduction was approved by the IRS for tax year 2009.  I tried to confirm nothing has changed for tax year 2012, but the latest IRS 936 on the IRS website is still the 2011 version.  Hopefully, one of the tax pros can comment on this.
    • i am also looking for info in this and having a hard time with it
    • Thank you very much for this post. I am going through the exact same thing now.
    • Yes, its fully deductible in the year paid.  Its part of the payments you made on your HUD closing statement on the date you closed.  Then you just happened to finance the amount into your loan.  But you actually paid it on the date of your closing.  Thus it's fully deductible the year you paid it (i.e. CLOSED)..
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    Thanks very much for taking the time to post this answer in detail.  It will likely prove to be of value to many other posters.
    • Hey Stok,   Thank you for this entry.  I have the exact same problem.  I sent them the HUD-1, but nothing from the VA (Yet).  The IRS replied my HUD statement was insufficent.  Who did you contact at the VA.  I will try that next and send it all again.  

      Thanks to your posting at least I know I can find resolution (and peace of mind while the IRS gets it together)
    • Loucpher,

      I went on the Va website at www.va.gov.  I clicked on the "contact us" link on the right. side, then selected "ask a question" from the drop-down menu.  Then you will come a page with several blocks and one is named "ask a question" indicating to use this if you were unable to find your answer eslewhere on the page.  I clicked the link and came to a page where I entered my information/question and indicated I wanted my answer by e-mail.  Then I clicked submit and got an answer in couple of days.  I sent a copy of their reply along with e-mail from my bank (mortgage issuer) showing their refusal to include the funding fee.  Here is the  response below I got back from the VA.  If you need anything else, just let me know.

      Stok


       Response via Email Via Email (Dept of Veterans Affairs)
      07/12/2011 02:15 PM
      The VA does not issue 1098's, however, your HUD 1 settlement statement, may be helpful. Please contact IRS for tax information.
      Have a great day!

       

       

       [---001:000981:35575---]
    • Thank you for posting this, and the resolution.  We are getting ready to do our year 2011 taxes, and I happened to read somewhere that the VA funding fee was tax deductible.  I called USAA and they said they do not include points or the VA funding fee on their 1098's because not everyone can deduct them.  They told me just to use my HUD.  I am still nervous about taking the deduction, even though everything I've read supports it!  Our funding fee was nearly $7000.  It is not common knowledge that this can be deducted!
    • Definitely not common knowledge. I consulted with a tax accountant with more than 20 years experience for help when I received the notice from the IRS that the VA funding fee was not deductible and I owed back taxes and interest.  The tax accountant agreed with the IRS, said it was NOT deductible.  Then I showed the IRS publication 936 showing that it was deductible.  The accountant changed her mind and said, "my bad, it is deductible.".  Then asked for payment for services and help rendered???  Also, I just checked the IRS publication 936 for "2011" (published last month on the IRS website).  It shows that the VA funding fee is again deductible for 2011.  However, it mentions there are income limits.  It states, "If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filling status is married & filing separately), the amount of your insurance premiums that are otherwise deductible is reduced and may be eliminated" (reference IRS publication 936, page 7, for tax year 2011).
    • My understanding is that the VA funding fee was deductible through 2011 but is NOT deductible for 2012 because congress did not renew this law.  "At the time of publication, the mortgage insurance deduction had expired and not yet been extended for the 2012 tax year. Lenders typically require mortgage insurance if you can only afford a small down payment. Mortgage insurance includes private mortgage insurance premiums, VA funding fees and Rural Housing Service guarantee fees. If Congress does extend the deduction, you're allowed to write off the mortgage insurance you pay as long as your income falls below the annual limits."  How can I find out if congress extended this deduction??
    • Not passed by the senate yet:  http://beta.congress.gov/bill/112th-congress/senate-bill/3470
    • This bill is concerning making the deductibility permanent.  I just checked the IRS website again.  The IRS pub 936 for 2012 is now showing on the website at: http://www.irs.gov/pub/irs-pdf/p936.pdf.  On page 8, it indicates that the VA funding fee "is deductible" for 2012 at the center of the page under "Mortgage Insurance Premiums", "qualified mortgage insurance".
    • Caveat: Everyone considering taking this deduction should first check the current income limits for this deduction on the same page.
    • Thank you for find this!
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