Is the VA Funding Fee Tax Deductible? (Yes, Starting in 2026)

Yes, and Here Is How It Works

The VA itself announced it plainly: "the VA funding fee is now tax-deductible." The mechanism is that the fee is treated as an upfront mortgage insurance premium, the same category as the upfront MIP on an FHA loan. To claim it, you itemize on Schedule A (Form 1040) and report the funding fee amount as the premium.

The VA's announcement came with the usual and correct disclaimer, which I will repeat because it matters: this is not tax, legal, or accounting advice. The deduction is real, but your ability to use it depends on your filing situation. Talk to your tax preparer before you file.

The Math: What It Is Actually Worth

A deduction is worth your marginal tax rate times the deduction. It is not a credit; it does not come back dollar for dollar. Here are three realistic cases:

The pattern is obvious: the deduction is worth the most to borrowers with large fees and high marginal rates. The subsequent-use buyer financing $450,000 at 3.3% gets a deduction nearly six times the size of the first-time buyer with 10% down. This is one of the places where the funding fee's true cost, which I have written about before, drops meaningfully: the effective fee is the fee minus the tax savings.

The Three Catches

1. You must itemize

The deduction lives on Schedule A. For 2026 the standard deduction is $16,100 for single filers and $32,200 for joint filers. If your total itemized deductions, mortgage interest plus property taxes plus the funding fee plus everything else, do not exceed the standard deduction, the funding fee deduction does you no good. The year you buy is often the year itemizing makes sense anyway, since the fee is a large one-time amount stacking on top of a full year of mortgage interest.

2. Only the year you paid

The fee is paid at closing. That is the deduction year. This is simple for purchases, but worth stating for refinances: an IRRRL's 0.5% fee and a cash-out refinance's fee are also paid at closing, and each is deductible in its own year. Keep the closing disclosure; it documents the exact amount.

3. Rolled-in fees still count

This is the pleasant surprise. Most borrowers finance the fee into the loan rather than paying cash at closing, and the deduction applies either way. The fee was still paid at closing, even if the lender paid the VA out of loan proceeds. You do not get a second deduction for the interest on the financed fee, that is just part of your mortgage interest deduction, but the fee amount itself is deductible once.

What If Your Fee Is Later Refunded?

There is one scenario that collides with this deduction: the disability-rating refund. If you paid the funding fee, later received a service-connected disability rating with a retroactive effective date, and got the fee refunded, the refund is generally reportable. Tax rules say you cannot keep a deduction for an amount you got back. I cover the refund process itself, VA Form 26-8937 and the timeline, in VA Funding Fee Refund: When Your Disability Rating Comes After Closing. If your year includes both the fee payment and a refund, that is a conversation for your tax preparer, not a DIY return.

Frequently Asked Questions