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Which Surrogacy Expenses are Tax Deductible?

November 4th, 2019
Which Surrogacy Expenses are Tax Deductible?

While in our hearts the gift of surrogacy is priceless, it can hit our savings account hard. It is wise to look for any possible avenues to save money on your path to parenthood - and to spend wisely - without sacrificing the quality needed to ensure the safety and health for all involved.

Below, we’ll provide a general, high-level overview of surrogacy expenses, what may or may not be tax deductible, and explain what a Private Letter Ruling is. However, it’s important to note that tax laws vary from state to state on both a federal and state level. It’s vital to do your own research to ensure you get the best possible answer as it pertains to your own situation. When it comes to medical deductions you may need to exceed a certain limit, so again, it can vary. It’s also recommended that you consult with an accountant to learn more about taxation policies.

I spoke to Edward “Brock” Brockschmidt, CPA Founder & CFO of Seed Trust, who has offered to help us out.

What surrogacy expenses, if any, are tax-deductible?

Brock: Surrogacy and donation expenses in general are not deductible. However, there are ways to make them deductible. The best way would be to obtain a Private Letter Ruling (PLR) from The Internal Revenue Service (IRS). The purpose of a PLR is to get permission from the IRS to deduct specific expenses that are not made clear by law.

Can you walk us through the Private Letter Ruling (PLR) Process?

Brock: The process would be as follows: Taxpayer (Parents) would engage with a CPA to write a letter to the IRS requesting permission to deduct the expenses. The letter should encompass all the expenses that they plan to incur.

The CPA would most likely cite § 213(a) “A taxpayer may deduct expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, spouse, or dependent, to the extent the expenses exceed 7.5 percent of adjusted gross income”. Section 213(d)(1)(A) provides that medical care includes amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Rev. Rul. 73-201, 1973-1 C.B. 140, and Rev. Rul. 73-603, 1973-2 C.B. 76, hold that vasectomies and operations that render a woman incapable of having children affect a structure or function of the body and thus may qualify as medical care under § 213. The IRS would then send a letter back to the parents/CPA indicating their decision. Upon a successful decision the parents would attach that letter to their tax return.

What about egg donor as a tax deduction?

Brock: In previous PLR’s, the IRS has sided with parents to make all surrogacy and egg donation expenses allowable. However, the problem with PLR’s is that they cannot be cited for future use in other cases. Given the past requests and their successes, I would believe that the parents would have a great chance of success in pursuing the deduction.

The great news is that once the private ruling has been awarded in favor of the parents, the entire process including the surrogacy agency fees could be deductible.

What goes into a PLR Ruling?

There are important factors that go into the PLR ruling. First, is that there is a tested infertility that has been confirmed to the taxpayer. The past PLRs have been related to heterosexual couples. Homosexual couples could have issues providing evidence they are infertile if none of the partners are infertile. There must be a medical need to pursue the deduction. While that may seem unfair, that is the IRS language around it. That doesn’t mean it will be turned down. There is just no evidence of successful past letters that I could find.

Second, this needs to be done well in advance of completing the journey. The process takes a long time. Sixty to ninety days is the standard, but it could take up to six months in complicated cases.

What are some general deductible costs?

Brock: Costs that are deductible are ones that are directly attributable to the parents. For example, any doctor visit that the parents are personally being examined would be deductible. Doctor’s appointments for the surrogate or egg donor would not be deductible. The same would go for medical testing.

There could be an argument made without a ruling that legal, agency and escrow fees are deductible as they directly involve the parents as one of the parties. However, I would be much more comfortable with a PLR before putting that on a tax return. They must be directly tied to a medical expense where the IRS could claim that they don’t recognize surrogacy and egg donation as a medical expense.

What Can Be Deducted:

  • Any medical expenses directly attributed to you and your spouse
  • Egg retrieval
  • Sperm donation
  • Sperm freezing
  • IVF costs

What Cannot Be Deducted:

  • Surrogate compensation
  • Surrogate medical bills
  • Surrogate medical insurance
  • Anything not directly related to your family

To learn more about your specific state, surrogacy and how ConceiveAbilities can support you every step of the way, please contact us. While this process can be overwhelming, we have a team of people who have been a surrogate, worked with a surrogate to build their family or have had years helping others build their families. We can help!