Are Surrogacy Costs Tax Deductible? Navigating the Complex World of Fertility Expenses

The short answer, delivered with the weight of years spent deciphering tax codes and advocating for families, is: sometimes, and it’s complicated. While the IRS doesn’t offer a straightforward “surrogacy expense” deduction, certain costs may be deductible as medical expenses, subject to specific conditions and limitations. It’s a legal labyrinth, but we’re here to guide you through it.

The Medical Expense Deduction: Your Potential Lifeline

The key to understanding potential tax deductions for surrogacy lies within the Internal Revenue Code (IRC) Section 213, concerning medical expense deductions. This section allows you to deduct expenses paid for medical care for yourself, your spouse, and your dependents, to the extent they exceed 7.5% of your adjusted gross income (AGI). Now, let’s dissect how this applies to surrogacy.

What Qualifies as a Medical Expense in Surrogacy?

Here’s where it gets nuanced. The IRS generally views medical expenses as those incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. In the context of surrogacy, the following could be considered medical expenses:

• Medical Procedures for the Intended Parent(s): If the intended parent(s) are diagnosed with infertility and undergo procedures such as in vitro fertilization (IVF) to create embryos, those costs are generally deductible. The IRS often considers treatments to overcome infertility a medical expense.
• Medical Care for the Surrogate: Expenses related to the surrogate’s medical care during the pregnancy, directly linked to carrying the child for the intended parents, can potentially be deductible. This includes prenatal care, delivery, and postpartum care. This area is prone to closer scrutiny by the IRS.
• Agency Fees Related to Medical Services: A portion of agency fees that are demonstrably related to medical services may be deductible. This requires careful documentation and allocation of expenses.

What Doesn’t Qualify?

It’s equally important to understand what expenses cannot be deducted:

• Surrogate’s Compensation (Base Fee): The fee paid to the surrogate for her services in carrying the child is generally considered a non-deductible personal expense. The IRS does not view this as a medical expense for the intended parents.
• Legal Fees: Legal fees associated with drafting surrogacy agreements, establishing parental rights, or related legal processes are generally not deductible as medical expenses.
• Insurance Premiums Paid by the Surrogate: The surrogate’s personal insurance premiums are not deductible by the intended parents.
• Travel Expenses of the Surrogate Unless directly related to medical appointments, travel expenses for the surrogate are unlikely to be deductible.

The Importance of Documentation and Allocation

The cornerstone of successfully claiming any medical expense deduction is meticulous record-keeping. Maintain detailed records of all expenses, including:

• Invoices and Receipts: Keep all invoices and receipts from medical providers, agencies, and other relevant parties.
• Contracts: The surrogacy agreement should clearly delineate the various fees and expenses.
• Letters from Doctors: A letter from a physician stating the medical necessity of the procedures for the intended parent(s) can be invaluable.
• Agency Breakdown of Costs: Request a detailed breakdown of agency fees, specifying the portion allocated to medical services.

Proper allocation of expenses is crucial. If an agency fee covers both medical and non-medical services, you must be able to clearly demonstrate what portion relates to deductible medical care.

State Laws: A Patchwork Quilt of Regulations

It’s critical to remember that state laws surrounding surrogacy vary widely. Some states have statutes explicitly addressing surrogacy, while others rely on common law principles. The legal framework in your state can influence how the IRS views the expenses. For example, some states mandate that surrogacy agreements be approved by a court, which can add another layer of legal fees.

Consulting with Professionals: Your Best Strategy

Given the complexities and the potential for misinterpretation, seeking guidance from qualified professionals is paramount. Consulting with a tax advisor specializing in fertility and family planning can provide invaluable insights and ensure compliance with IRS regulations. Additionally, consulting with a legal professional familiar with surrogacy laws in your state is equally important.

FAQs: Navigating the Surrogacy Tax Landscape

Here are some frequently asked questions to further illuminate the path:

FAQ 1: Can I deduct expenses paid in a prior year if the pregnancy extends into the current year?

Yes, you can generally deduct medical expenses in the year they are paid, regardless of when the services are performed. So, if you paid for IVF in 2023, but the surrogate didn’t deliver until 2024, you would deduct the IVF expenses on your 2023 tax return (assuming they meet the other requirements).

FAQ 2: What if the surrogacy is unsuccessful? Can I still deduct the expenses?

If the intended parent(s) have a documented medical condition (infertility) and the procedures were undertaken to overcome that condition, the expenses may still be deductible, even if the surrogacy is ultimately unsuccessful.

FAQ 3: Can I deduct expenses for multiple surrogacy attempts?

Yes, provided the intended parent(s) have a documented medical condition, expenses for multiple attempts may be deductible as medical expenses.

FAQ 4: What if I use an international surrogacy agency?

The same principles apply to international surrogacy. However, documentation can be more challenging. Ensure you have all invoices and receipts translated into English and properly itemized.

FAQ 5: Can I deduct travel expenses related to medical care?

Yes, you may be able to deduct certain travel expenses primarily for, and essential to, medical care. This includes transportation to and from medical appointments for the intended parent(s). However, travel expenses for the surrogate are treated differently, as mentioned before.

FAQ 6: What if the surrogacy agency offers a “package deal”? How do I allocate expenses?

Request a detailed breakdown from the agency outlining the specific costs associated with medical services, legal services, surrogate compensation, and other fees. This documentation is essential for proper allocation.

FAQ 7: How does the 7.5% AGI threshold work?

You can only deduct the amount of your medical expenses that exceeds 7.5% of your adjusted gross income (AGI). For example, if your AGI is $100,000, you can only deduct medical expenses exceeding $7,500.

FAQ 8: What tax form do I use to claim medical expense deductions?

You would use Schedule A (Form 1040), Itemized Deductions, to claim medical expense deductions.

FAQ 9: What is the “medical necessity” requirement?

The IRS requires that medical expenses be “medically necessary.” This means the expenses must be for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. A doctor’s letter outlining the medical necessity of procedures for the intended parent(s) can be helpful in substantiating this requirement.

FAQ 10: Can I deduct health insurance premiums?

You may be able to deduct health insurance premiums, but only to the extent they exceed 7.5% of your AGI when combined with other medical expenses. Premiums you paid for yourself, your spouse, and your dependents may be deductible.

FAQ 11: What happens if the IRS audits my return and questions my surrogacy deductions?

This is where meticulous documentation becomes crucial. Be prepared to provide all invoices, receipts, contracts, and doctor’s letters to support your claims. Working with a tax professional can help you navigate an audit.

FAQ 12: Are there any other tax benefits related to having a child through surrogacy?

Once the child is born and you have legal parental rights, you may be eligible for other tax benefits such as the Child Tax Credit and the Child and Dependent Care Credit (if applicable for childcare expenses).

Navigating the tax implications of surrogacy is undoubtedly complex. However, with careful planning, meticulous documentation, and the guidance of qualified professionals, you can potentially minimize your tax burden and maximize your family’s financial well-being. Remember, knowledge is power, and preparation is key to navigating this intricate landscape.