Reducing your tax liability is a goal of most homeowners. Aside from your real estate taxes and mortgage interest, you may have another deduction if you have a VA loan. It’s called the funding fee. You likely paid it in full at the closing. While it might seem like yet another unnecessary expense; it helps you secure a VA loan.
Without the VA funding fee, a lender will be less willing to give you a loan if you are a risky borrower. Looking at the VA loan guidelines, it’s fairly easy to qualify for a VA loan. You only need a 620 credit score and your debt ratio can be as high as 43%. This is all because the VA guarantees the loan for the lender. This means if you default, the VA will pay the lender back a portion of the money they lost.
Deducting the Funding Fee on Your Taxes
Let’s say you took out a $150,000 loan. On a home purchase, you’d pay $3,225 for the funding fee. This is 2.15% of your loan amount. If you paid the amount in cash and you meet the following guidelines, you may be able to deduct this total amount on your taxes:
- You closed on the home between January 1st and December 31st in 2017
- Your gross income is less than $100,000
- The home is your primary home
If you pay the fee in full, you should be eligible to deduct the entire amount on your taxes. Your tax professional can tell you if this applies to you or not.
What Else Can you Deduct on Your Taxes
Aside from the VA funding fee, there are other things you may deduct on your taxes as far as your mortgage goes.
As far as the closing, you can usually deduct any points you pay, whether discount or origination points. You can also deduct any prepaid interest and real estate taxes you pay at the closing.
The prepaid interest is the interest you pay for the month moving forward. Let’s say you close on your loan on October 5th. You won’t make a mortgage payment until December 1st. That December 1st payment only covers the interest for November. That leaves October 5th through October 31st unpaid. You pay this interest at the closing. However, you can likely deduct it on your taxes if you itemize your deductions.
You will also pay real estate taxes if you set up an escrow account. While you can’t normally deduct your escrow payments, in this case you can because it’s money used towards your real estate taxes. If the lender requires you to put 3 months of reserves into the account, for example, you can write that amount off on your taxes.
On an ongoing basis, you can write off the interest you pay on your mortgage as well as the real estate taxes you pay each year. This is one of the benefits of having a mortgage as you get to lower your tax liability by paying interest on the loan.
Before you assume you qualify for these tax deductions, though, you must talk to your tax advisor. He can let you know if you qualify for the VA funding fee deduction as well as any others pertaining to your mortgage.