Veterans can no longer write off the VA funding fees associated with their VA-guaranteed mortgages. A tax extender bill, which Congress did not pass before the end of 2011, contained the Mortgage Insurance (MI) tax benefit that was important to many homeowners. The Mortgage Insurance (MI) tax deduction originated with the Tax Relief and Health Care Act of 2006. The MI deduction was effective through 2011.
The bill containing the MI tax deduction and 58 other tax code credits like those for energy-efficiency home improvements, builders for energy-efficient homes and state and local sales taxes failed to pass due to a Congressional stalemate. Congress could not agree on several controversial items added to the tax extender bill. Among them were the Keystone XL pipeline, payroll tax cuts, unemployment insurance and Medicaid benefits. Prolonged debate over these more controversial items kept the tax deduction items in the bill in limbo. Consequently, the MI tax deduction has expired.
Mortgage Insurance (MI) is a common fee paid monthly on most mortgages if a homeowner has less than 20% equity in the property. VA loans don’t require monthly mortgage insurance premiums; however, the VA funding fee, is seen by the IRS as a type of mortgage insurance for the zero-down VA loan program. The VA funding fee can either be included in the amount of the loan or paid in full at the time of closing. Before 2012, the fees could be deducted fully as part of the MI tax benefit. Certain surviving spouses and disabled veterans are exempt from the fee.
On the tax extender bill’s first time through, the House barely passed it. Then, the Senate approved their own version of the bill with a two-month extension of the tax benefits, until an agreement could be reached on the other issues. It’s possible that Congress may retroactively reinstate all or some of the tax write-offs for 2012, including the MI tax deduction. The decision may require agreeing on some controversial issues of the bill first.
The MI deduction was a valuable write-off for many veterans who paid the VA funding fee. A typical funding fee for a first-time homebuyer in the military is 2.14%. On a $250,000 home, that’s $5,350. Renewing the MI deduction would allow those who pay VA funding fees to fully deduct them on their federal tax returns.
For more on VA loans, contact an experienced specialty lender.
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