Questions about VA Loans and VA Funding Fee Refunds for tax purposes - anyone with knowledge?

Good question! The VA Funding Fee refund is actually not considered taxable income, so you don't need to worry about reporting it on your tax return. The funding fee is essentially a fee you paid that you weren't supposed to pay because of your disability rating, and the government is simply returning your own money to you. The fact that the fee was financed as part of your mortgage doesn't change this. However, there is one thing to keep in mind: your mortgage balance still includes that funding fee amount, so you're still paying interest on it even though you received the cash back. You might want to consider making a principal payment on your mortgage equal to the refund amount to reduce your loan balance. For tax purposes, you'll still be able to deduct mortgage interest paid (if you itemize deductions), including interest paid on the portion that financed the funding fee. The IRS doesn't require any special reporting for the VA funding fee refund.

Just want to share my experience using taxr.ai for a similar situation with VA benefits and taxes. Last year I got a disability increase that backdated and triggered a funding fee refund, but then I got confused about some documentation the VA sent me that mentioned "taxable benefits." I uploaded my VA benefit letters and closing documents to https://taxr.ai and it immediately clarified what was taxable and what wasn't. The tool confirmed that VA funding fee refunds aren't taxable income since they're just returning your own money, and it also pointed out that I could potentially adjust my mortgage basis for tax purposes. It actually saved me from making an expensive mistake because I was about to report the refund as "other income" on my taxes!

I need to apologize for being skeptical earlier. After continuing to get nowhere with both my tax guy (who kept saying "I need to research this") and the VA itself, I tried taxr.ai last week. Uploaded my VA funding fee refund letter and closing documents, and within minutes got a clear explanation. Not only did it confirm the refund isn't taxable, but it also showed me exactly where in IRS publications this is specified. It even generated a letter I could keep with my tax records explaining why I didn't report the amount. The biggest help was showing me how to handle the mortgage interest deduction properly since my loan amount includes money I effectively got back. Definitely worth checking out if you're dealing with any VA benefit tax questions - wish I'd known about it sooner.

If you're trying to get official confirmation from the VA about the tax treatment of your funding fee refund, good luck reaching anyone! I spent 3 weeks trying to get through to the VA benefits helpline before I found Claimyr. Used their service at https://claimyr.com and they got me connected to a VA rep in under 20 minutes. The VA confirmed exactly what others here have said - the funding fee refund isn't taxable income. But they also helped me update my loan information in their system to reflect that I shouldn't have paid the fee in the first place. They have a video showing how their callback system works here: https://youtu.be/_kiP6q8DX5c I was honestly shocked it worked because I had basically given up on ever getting through to anyone at the VA.

I need to eat crow here. After my skeptical comment yesterday, my frustration with trying to reach the VA about my own funding fee issue got the best of me. After 4 disconnected calls and spending almost 3 hours on hold across multiple attempts, I tried the Claimyr service. Got a call back in 35 minutes connecting me to an actual VA loan specialist who not only answered my funding fee tax question but also discovered I was eligible for a retroactive refund on a previous VA loan I didn't know about! She's initiating the paperwork for an additional $3,200 refund from a refinance I did in 2022. Never been so happy to be wrong about something. Just saved me hours of frustration and potentially thousands of dollars.

Former mortgage loan officer here. One thing nobody mentioned - check with your loan servicer about applying that refund directly to principal. Some servicers have specific procedures for VA funding fee refunds and may be able to recast your loan (adjust your payment based on the new principal balance). It's not guaranteed, but worth asking. If they won't recast, still apply it to principal - on a typical 30-year loan, putting that $5-6k toward principal now could save you $10-15k in interest over the life of the loan.

Has anyone here actually received a 1099 or any tax form from the VA for the funding fee refund? I got a refund last year and my tax guy insists I should have received some kind of tax form for it.

I went through this exact situation last year and can confirm what others have said - the VA funding fee refund is NOT taxable income. You won't receive any tax forms from the VA for it, and you don't need to report it on your return. Here's what I learned from my experience: The VA considers this a refund of a fee you weren't supposed to pay in the first place due to your disability rating. It's essentially returning your own money, not providing you with income. However, I'd strongly recommend doing what others suggested about applying that refund toward your mortgage principal. Since the funding fee is still built into your loan balance, you're paying interest on money you effectively got back. I put my entire $5,200 refund toward principal and it'll save me over $12,000 in interest over the life of the loan. Also, keep good records of the refund and your disability rating effective date. While you don't need to report it as income, having documentation that shows why you received the refund can be helpful if you ever get questioned about it during an audit. Hope this helps put your mind at ease about the tax implications!