source:
  type: guide
  id: va-m26-7-ch04-t03
  authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 4, Topic 3 — Income Taxes
    and Other Deductions
  description: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 4, Topic 3 — Income
    Taxes and Other Deductions.
  coverage_tier: operative
obligations:
- id: va-m26-7-ch04-t03-full
  canonical_id: va-m26-7-ch04-t03-full
  section: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 4, Topic 3 — Income Taxes
    and Other Deductions
  type: do
  tags:
  - regulator-direct
  - va
  - va-handbook
  - corpus-expansion
  - tier-operative
  primary_source:
    tier: 1
    authority: VA Lenders Handbook (VA Pamphlet 26-7), Chapter 4, Topic 3 — Income
      Taxes and Other Deductions
    source_class: va-handbook
    source_url: https://www.benefits.va.gov/warms/pam26_7.asp
    snapshot_id: 84a199d5bffee03b
    fetched_at: '2026-05-23T01:53:52Z'
    content_hash: sha256:ed2c25537e999a4e2d8f0edd102b19b58213237b1a9caa927fddfca170b14a9c
    paragraph_quote: '3. Income Taxes and Other Deductions Change Date February 22,
      2019 • This chapter has been revised in its entirety. a. Income Tax and Social
      Security Deductions Determine the appropriate deductions for Federal income
      tax and Social Security using the “Employer’s Tax Guide”, Circular E, issued
      by the Internal Revenue Service (IRS). Determine the appropriate deductions
      for state and local taxes using similar materials provided by the states. The
      income tax should be based upon the borrower’s residence and what is documented
      in the guide to the IRS, and not solely the amount claimed on the paystub. An
      active-duty servicemember’s LES may have a different state tax deduction than
      the state where the active-duty servicemember will be purchasing a residence
      or refinancing. Select the state listed on the LES for the state taxes to be
      considered in state tax deductions. The lender may consider the borrower’s potential
      tax benefits from obtaining the loan (for example, mortgage interest deduction)
      in the analysis. To do so: • determine what the borrower’s withholding allowance
      will be, using the instructions and worksheet portion of IRS Form W-4, Employee’s
      Withholding Allowance Certificate, and • apply that withholding number when
      calculating Federal and state income tax deductions on VA Form 26-6393, Loan
      Analysis, then • document the change in deductions in Item 47, Remarks, on VA
      Form 26-6393, Loan Analysis. Continued on next page VA Pamphlet 26-7, Revised
      Chapter 4: Credit Underwriting 4-33 3. Income Taxes and Other Deductions, continued
      b. Income Tax Credits from Mortgage Credit Certificates (MCC) MCCs issued by
      state and local governments may qualify a borrower for a Federal tax credit.
      The Federal tax credit is based on a certain percentage of the borrower’s mortgage
      interest payment. Lenders must provide a copy of the MCC to VA with the loan
      package which indicates: • documentation verifying any expenses charged by the
      local government entity for the program which is listed on the Closing Disclosure
      Statement, and the percentage to be used to calculate the tax credit, and if
      applicable, the amount of the indebtedness. The certified indebtedness can be
      comprised of a loan incurred by the borrower to acquire a principal residence
      or a qualified home improvement rehabilitation loan. There is an IRS annual
      limit on the tax credit equal to the lesser of the borrower’s maximum tax liability
      or $2,000. Calculate the tax credit by applying the specified percentage to
      the interest paid on the certified indebtedness. Then apply the annual limit.
      Example: The MCC shows a 30 percent rate and $100,000 certified indebtedness.
      The borrower will pay approximately $8,000 in annual mortgage interest. The
      borrower’s estimated total Federal income tax liability is $9,000. Calculate
      the tax credit as follows: Step Procedure 1 30 percent of $8,000 = $2,400 2
      Apply the IRS annual $2,000 limit 3 The tax credit will be $2,000 This allows
      use of $167 (one-twelfth of $2,000) as income to qualify the borrower. If the
      mortgage on which the borrower pays interest is greater than the amount of certified
      indebtedness, limit the interest used in the tax credit calculation to that
      portion attributable to the certified indebtedness. Since these programs are
      offered by state and local government(s), pre- approval by VA is not required
      for the borrower to participate in the program. The lender is responsible to
      determine all eligibility requirements are met by the borrower to participate
      in the program. Continued on next page VA Pamphlet 26-7, Revised Chapter 4:
      Credit Underwriting 4-34 3. Income Taxes and Other Deductions, continued c.
      Other Deductions from Income Include any costs for job-related expenses, child
      care, significant commuting costs, and any other direct or incidental costs
      associated with the borrower’s or spouse’s employment. For children up to the
      age of 12 years, the lender is responsible for determining if there are any
      child care expenses for the borrower(s). VA Pamphlet 26-7, Revised Chapter 4:
      Credit Underwriting 4-35'
  judgment: false
