IRS Loophole: VA Fee Vanishes

The Department of Veterans Affairs just confirmed that veterans who paid a VA funding fee can now deduct it on their 2026 federal taxes — a real money-saving benefit that many veterans don’t even know exists.

Quick Take

The VA officially announced that veterans, service members, and surviving spouses can deduct the VA funding fee starting with tax year 2026.
The deduction goes on Schedule A of Form 1040, similar to how mortgage interest is claimed, but you must itemize to benefit.
The fee ranges from 0.5% to 3.3% of the loan amount — on a $300,000 loan, that could mean a deduction of over $6,000.
Income limits apply: the deduction phases out between $100,000 and $109,000 in adjusted gross income and disappears entirely above that range.

VA Makes It Official: The Funding Fee Is Now Deductible

The Department of Veterans Affairs (VA) announced that veterans, service members, and surviving spouses who buy a home with a VA-backed loan can now deduct the VA funding fee on their federal taxes. This applies starting with tax year 2026. The deduction works like a mortgage insurance premium and is claimed on Schedule A of IRS Form 1040. You must itemize your deductions — not take the standard deduction — to get this benefit.

The VA funding fee is a one-time charge built into most VA loans. It helps fund the program so it stays available for future veterans. The fee ranges from 0.5% to 3.3% of the loan amount, depending on your down payment, loan type, and whether it’s your first or subsequent VA loan use. On a $300,000 loan with no money down and first-time use, that fee is 2.15% — or $6,450. That’s a significant deduction most veterans have never been able to claim before.

Who Qualifies and How Much Can You Deduct

To claim the deduction, your adjusted gross income (AGI) must be at or below $100,000 for the full benefit. The deduction phases out by 10% for every $1,000 your AGI exceeds $100,000. Once your AGI tops $109,000 — or $54,500 if you’re married filing separately — the deduction disappears entirely. If you paid the fee upfront at closing, you deduct it in the year you paid it. If you rolled it into your loan, the deduction may be spread over time.

Veterans United and other veteran-focused lenders confirm the deduction is available in 2026 for eligible borrowers. The key steps are simple: gather your closing documents to find the exact fee amount, confirm you’re itemizing deductions, and enter the amount on the mortgage insurance premium line of Schedule A. If you’re unsure, a tax professional familiar with VA loans can walk you through it.

Important Exceptions Veterans Should Know

Not every veteran pays the funding fee — and if you don’t pay it, there’s nothing to deduct. Veterans who receive VA compensation for a service-connected disability are fully exempt from the fee. That exemption applies at any disability rating, from 10% to 100%. Purple Heart recipients on active duty are also exempt. These veterans already get a valuable break on the front end — they just won’t see a tax deduction for a fee they never paid.

FHA, VA, and Conventional loans all handle mortgage insurance and funding fees differently, these costs can shape your true bottom line. Which fee structure do you think offers the best value? pic.twitter.com/ARew9dpSod

— Dennis O'Brien (@dennisandlaurie) July 13, 2026

Some older sources and a few veteran-focused websites still say the VA funding fee is not deductible, calling it a loan fee rather than mortgage interest. That view reflects the old rules. The deduction had expired in 2021 and was not available for several years. Congress restored it for 2026, and the VA made the announcement official. If your tax preparer or lender hasn’t heard about this change yet, show them the VA’s official announcement and ask them to review your situation before you file.