Is the VA Funding Fee Tax Deductible? 2026 Rules

Yes — for the first time since 2021, the VA funding fee is tax deductible. The One Big Beautiful Bill Act, signed July 4, 2025, permanently restored the federal deduction for mortgage insurance premiums starting with tax year 2026, and the VA funding fee has always counted as mortgage insurance under the tax code. If you close on a VA loan in 2026 and itemize your deductions, the fee, often $8,000 or more, comes off your taxable income.

There are two real catches, and one widely repeated number that's wrong. Here's what the law actually says.

Why the VA funding fee is tax deductible again in 2026

Between 2007 and 2021, taxpayers could deduct qualified mortgage insurance premiums as home mortgage interest. Congress let that provision expire after December 31, 2021, so fees paid from 2022 through 2025 got no deduction at all.

Section 70108 of the One Big Beautiful Bill Act (P.L. 119-21) brought it back — this time without an expiration date. The change applies to tax years beginning after December 31, 2025, which means premiums paid in calendar year 2026, claimed on the return you file in spring 2027.

The funding fee qualifies because 26 U.S.C. §163 defines "qualified mortgage insurance" as mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, plus private mortgage insurance. IRS Publication 936 spells it out: "Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee."

To qualify, the loan must be on your main home or a second home, and you must be legally obligated on the mortgage.

What the deduction is worth

A deduction isn't a refund — it reduces the income you're taxed on. So its value is roughly the fee multiplied by your marginal tax bracket. On a first-use, $0-down $400,000 purchase, the 2.15% funding fee comes to $8,600:

Using your benefit a second time with nothing down? The subsequent-use fee is 3.3%, or $13,200 on that same loan, which would trim a 22%-bracket tax bill by roughly $2,904. Check what your own fee would be with the funding fee calculator.

The two catches: itemizing and the income phase-out

Catch 1 — you have to itemize

The deduction lands on Schedule A, which only pays off when your itemized deductions exceed the standard deduction. For tax year 2026 the IRS set the standard deduction at $16,100 for single filers, $32,200 for married filing jointly, and $24,150 for heads of household.

The year you close a home purchase is exactly when itemizing becomes most likely: a full or partial year of mortgage interest, the funding fee, and state and local taxes often stack past the threshold together. In later years you may fall back to the standard deduction. That's fine: the funding fee is a one-time charge deducted in the year you pay it.

Catch 2 — the phase-out ends at $109,000, not $110,000

Plenty of 2026 articles say the deduction "phases out between $100,000 and $110,000." The statute is stricter. Under §163(h), the deductible amount drops by 10% for each $1,000, or fraction thereof, that your adjusted gross income exceeds $100,000. That "fraction thereof" means an AGI of $109,000.01 already counts as ten steps down: zero deduction. The IRS worksheet in Publication 936 confirms it: above $109,000 ($54,500 married filing separately), you can't deduct anything.

For married couples filing separately, the phase-out runs from $50,000 to $54,500.

Financed your funding fee? You can still deduct all of it

Most borrowers roll the funding fee into the loan instead of paying cash at closing. Some outlets claim a financed fee must be deducted bit by bit over the life of the loan. That's not what the IRS says about VA fees.

Prepaid mortgage insurance generally has to be spread over 84 months; that's the rule FHA borrowers live with for upfront MIP. But 26 U.S.C. §163 carves out an explicit exception: the allocation rule "shall not apply to amounts paid for qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service." Publication 936 applied that exception plainly the last time the deduction was alive: the funding fee "can either be included in the amount of the loan or paid in full at the time of closing," and either way it could be "deducted fully" in the year the insurance contract was issued.

Practical upshot: close in 2026, deduct the whole fee on your 2026 return, whether you wrote a check or added it to the balance. Look for the amount on your Closing Disclosure, and check box 5 of the Form 1098 your servicer sends in January.

If you're exempt from the fee, there's nothing to deduct — and that's better

Veterans receiving disability compensation, eligible surviving spouses, and Purple Heart recipients on active duty pay no funding fee at all. No fee means no deduction — you already kept 100% of the money instead of your bracket's share of it.

Two related situations worth knowing:

• If you believe you qualify for the exemption, sort it out before closing. Our guide to the funding fee disability exemption walks through how the exemption works and who qualifies.
• If you paid the fee and later received a retroactive disability rating, you may be owed the money back — see how VA funding fee refunds work. A fee that's refunded to you isn't deductible.

2026 funding fee rates at a glance

The deduction's size depends on the fee, and the fee depends on your down payment and whether you've used the benefit before. Current VA rates, unchanged since April 2023:

The full breakdown — manufactured homes, assumptions, NADL loans, and every exemption — lives in our 2026 VA funding fee guide. The fee is one line in your closing math; the rest is in VA loan closing costs for 2026.

Bottom line

The VA funding fee is deductible again starting with tax year 2026 — permanently this time. It's worth a four-figure cut in taxable income for a typical buyer, but only if you itemize and your AGI stays at or below $109,000. If you financed the fee, deduct all of it in the year you closed; if you're exempt, you already got a better deal than any deduction. Thinking about using your benefit while the math is this favorable? Start with our 2-minute eligibility check.