As any parent knows, welcoming a baby into your life can be expensive. These costs are even higher when your parenthood is made possible through surrogacy. Intended Parents face a large range of expenses: agency fees, surrogate compensation and expenses, clinic fees, and legal costs.
Before embarking on your surrogacy journey, you should have a good understanding of what expenses are involved and what may or may not be tax-deductible. It’s also important to understand the tax laws that apply to your own state, as these vary between states.
Consulting with an accountant can be helpful as they will be able to explain more about taxation policies as they pertain to your own situation. Tax laws can change regularly, so what is true right now, may not be true in six months.
What surrogacy expenses are tax-deductible?
Surrogacy and donation expenses are mostly not tax-deductible. However, there are a few exceptions.
Under the Tax Cuts and Jobs Act (TCJA) of 2017*, some significant changes were made regarding the ability of Intended Parents to claim tax back on surrogacy expenses.
The changes to the deductibility of medical expenses have been a little tricky for some IPs who have created families through third-party reproduction (also known as assisted reproductive technology or ART). ART includes clinic fees for standard procedures involved in surrogacy, as well as hormone therapy and sperm donation. It also covers more advanced procedures, such as IVF and the use of egg donation.
In most cases, if medical expenses such as ART exceed a certain percentage of the parents’ Adjusted Gross Income (AGI), they can be deducted in the same year that expenses not reimbursed by healthcare insurance are paid. When applying for medical deductions, there may be instances in which you will need to exceed a certain limit.
AGI comprises all of an individual’s income before other deductions or decreases are made.
From 2019 through 2025, qualifying medical expenses are only deductible to the extent they exceed 10% of AGI.
The good news is that most forms of ART are deductible under the Tax Cuts and Jobs Act.
The following surrogacy expenses are generally deductible:
- Any medical fees directly involving you and/or your spouse
- Egg retrieval
- Sperm donation
- Sperm freezing
- IVF-related fees
Unfortunately though, surrogacy is not. This is because the expenses incurred in using a surrogate are not for medical procedures performed on the bodies of Intended Parents (the taxpayers). Instead, surrogacy requires the participation of a third party.
Non-deductible surrogacy expenses include:
- Compensation for your surrogate
- The surrogate’s medical bills
- The surrogate’s medical insurance
- Any costs for procedures or tests not directly attributed to you or your spouse
Other avenues for obtaining surrogacy tax deductions
There are cases in which Intended Parents may 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. If you are successful in getting a private ruling awarded in your favor as Intended Parents, the entire process including the surrogacy agency fees could be tax-deductible.
Obtaining a PLR would involve the Intended Parents engaging with a CPA to write a letter to the IRS requesting permission to deduct the expenses. The letter should encompass all the expenses that are likely to be involved in their surrogacy journey. It should detail why the parents are incapable of having children (due to a structure or function of the body) and that their situation may qualify as medical care under section 213. The IRS would then respond with its decision. If the PLR is ruled in their favor, the Intended Parent would be provided a letter to attach to their tax return.
How do you obtain a Private Letter Ruling (PLR)?
To obtain a PLR, the taxpayer must be able to show that they have been tested and confirmed as infertile. It is important to note that the PLR process is neither quick nor simple. Once you’ve submitted your documentation, the ruling may take 3 to 6 months to finalize.
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