The choice of using surrogacy is not a cheap one; expenses come in layers and the end amount is often astronomical. Leaving the exaggeration aside, the high cost for a surrogacy makes up of agency fees, surrogate compensation (base and miscellaneous), medical expenses (self and surrogate), insurance expenses, and legal fees. Now, a prospective Intended Parent might ask, if at all, are any of these expenses tax deductible? Our “answer” takes you back to a typical law school classroom where the professor says, “Well, it depends.”
To understand whether any of these potential expenses is tax deductible, the Internal Revenue Service (IRS) looks to whether the expenses are considered as personal medical care.
Section 213(a) permits expenses paid for medical care of the taxpayer, his spouse, or his dependent, to be deductible to the extent such expenses exceed 7.5 percent of the taxpayer’s adjusted gross income.
Section 213(d)(1)(A) defines “medical care” to include “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body[.]”
To quality as medical care, the said procedures must essentially affect the function or structure of the taxpayer’s, his spouse’s, or his dependent’s body. Simply said, there must be something wrong with your reproductive ability. To bring these statutes to life, in Morrissey v. United States, a claimant, who was in a same-sex relationship, sought to deduct expenses pursuant to his surrogacy arrangement. 871 F.3d 1260 (11th Cir. 2017). The obvious question to the Court was whether the medical procedures affected the claimant’s own body. Id. at 1265. In rejecting the claimant’s request, the Court relied on the plain language of Section 213(d)(1)(A) and found that, as a healthy and fertile man, the medical procedures or surrogacy fees incurred pursuant to the surrogacy arrangement did not affect his body’s function or structure. Id. at 1268. The expenses were ultimately ruled not deductible because they were never related to the taxpayer’s own body.
Now then, are any of these expenses tax deductible? Yes, following the IRS’s instructions, medical expenses such as egg/sperm retrieval, egg/sperm donation, egg/sperm cryopreservation, and related IVF procedures are deductible so long as they are directly attributable to the taxpayer claiming such deductions, subject to Section 213(a). This will mean that expenses such as agency fees, surrogate compensation, insurance expenses (for the surrogate), and legal costs are most likely not deductible.
Another possible alternative to request deduction will be to seek a Private Letter Ruling (PLR) from the IRS, a service which the IRS provides advice to taxpayers pursuant to Revenue Procedure 2022-1. By submitting a request, a taxpayer can confirm whether a tax violation may or will have occurred. This process will typically involve having a CPA to draft a request letter and a favorable ruling will only be conclusive as to your particular tax matter.
As the practice of surrogacy is spreading globally, not all parents who pursue surrogacy have or experience infertility; for these parents, it will mean getting deductions other than those specified by the IRS will be essentially impossible. Undoubtedly, this topic may seem irrelevant as Intended Parents are often viewed as wealthy individuals. Unbeknownst to most people, many parents take out loans to pursue surrogacy; for these parents, and the growing amount of them, any chance of easing financial burden is invaluable.
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