This post relates to US Federal taxes – as we are not accountants we ask that you consult a tax account to verify this information before filing your taxes, this information is provided for information purposes only.
Trying to figure out how much, if any of your surrogacy expenses are deductible can be overwhelming. The following information is to help you and your tax accountant to figure out how much of your surrogacy expenses are deductible.
Throughout this document, italicized text is cut and pasted exactly from IRS Pub 502.
Whose expenses can you deduct?
You can generally include medical expenses you pay for yourself, as well as those you pay for someone who was your spouse or your dependent either when the services were provided or when you paid for them. (Publication 502)
A surrogate mother is, of course, neither the taxpayer nor the taxpayer’s spouse, and typically is not a dependent of the taxpayers. Neither is a third party egg donor. Nor is an unborn child. Payments on behalf of any of these parties are not deductible.
However, expenses for the taxpayer, taxpayer’s spouse, or the child (once born), are deductible.
How much can you deduct?
First, you have to be itemizing your deductions in order to take a medical deduction. You’ll need to check whether the total of your itemized deductions is greater than the standard deduction. If so, it makes sense to itemize your deductions. That topic is outside the scope of this post.
With regard to medical expenses, you can only deduct medical expenses that exceed 7.5% of your adjusted gross income. So if medical expenses are equivalent to 5% of your adjusted gross income, you cannot deduct any medical expenses.
Which expenses can you deduct?
Payments to the Surrogate.
Prevailing views are that you cannot deduct these, but it hasn’t been tested in court.
If the sperm and egg donor is either the taxpayer or the taxpayer’s spouse, then any medical expenses for the egg donor and sperm donor are deductible. This would typically include all the IVF-like expenses including doctor visits, lab fees, and medication.
You can include in medical expenses amounts you pay for prescribed medicines and drugs. A prescribed drug is one that requires a prescription by a doctor for its use by an individual. You can also include amounts you pay for insulin. Except for insulin, you cannot include in medical expenses amounts you pay for a drug that is not prescribed.
Imported medicines and drugs. If you imported medicines or drugs from other countries, see Medicines and Drugs From Other Countries , under What Expenses Are Not Includible, later.
There is additional language in Publication 502 that specifically references fertility treatment which says:
You can include in medical expenses the cost of the following procedures to overcome an inability to have children.
• Procedures such as in vitro fertilization (including temporary storage of eggs or sperm).
• Surgery, including an operation to reverse prior surgery that prevented the person operated on from having children.
The airfare for egg transfer and sperm donation trip should be deductible for both travellers, as it seems to fall under the language below.
Whether the airfare to pick-up the baby can be deducted is open to debate, and whether it is deductible for both parents would be open to further debate. Although, airfare for the second parent is probably not deductible.
This does not seem to have been tested in a court. You may read the language below and make your own call. The language in Publication 502 says:
You can include in medical expenses amounts you pay for transportation to another city if the trip is primarily for, and essential to, receiving medical services. You may be able to include up to $50 per night for lodging. See Lodging , earlier.
You cannot include in medical expenses a trip or vacation taken merely for a change in environment, improvement of morale, or general improvement of health, even if the trip is made on the advice of a doctor. However, see Medical Conferences , earlier.
Publication 502 also says: Transportation
You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care.
You can include:
• Bus, taxi, train, or plane fares or ambulance service,
• Transportation expenses of a parent who must go with a child who needs medical care,
• Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone, and
• Transportation expenses for regular visits to see a mentally ill dependent, if these visits are recommended as a part of treatment
Transportation expenses you cannot include. You cannot include in medical expenses the cost of transportation in the following situations.
• Going to and from work, even if your condition requires an unusual means of transportation.
• Travel for purely personal reasons to another city for an operation or other medical care.
• Travel that is merely for the general improvement of one’s health.
• The costs of operating a specially equipped car for other than medical reasons.
Next question is hotel costs for both trips. The language says that hotel lodging can be deducted if certain requirements are met. See below. The portion of lodging costs that are medical care related should be deductible, with a limit of $50 per person per day or $100 per couple per day. For the sperm donation/egg transfer trip lodging expenses for both partners should be deductible (you can include lodging for a person traveling with the person receiving medical care). The baby pick-up trip is slightly trickier, but the language does seem to allow up to $100 per day ($50 for one parent and $50 for the baby).
You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if a principal reason for being there is to receive medical care. See Nursing Home , later.
You may be able to include in medical expenses the cost of lodging not provided in a hospital or similar institution. You can include the cost of such lodging while away from home if all of the following requirements are met.
1. The lodging is primarily for and essential to medical care.
2. The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital.
3. The lodging is not lavish or extravagant under the circumstances.
4. There is no significant element of personal pleasure, recreation, or vacation in the travel away from home.
The amount you include in medical expenses for lodging cannot be more than $50 for each night for each person. You can include lodging for a person traveling with the person receiving the medical care. For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. Meals are not included.
Do not include the cost of lodging while away from home for medical treatment if that treatment is not received from a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital or if that lodging is not primarily for or essential to the medical care received.
The language here is less precise. Because signing a legal contract with the clinic is “necessary for the medical care”, it seems that the legal fees are deductible. Publication 502 says:
You can include in medical expenses legal fees you paid that are necessary to authorize treatment for mental illness. However, you cannot include in medical expenses fees for the management of a guardianship estate, fees for conducting the affairs of the person being treated, or other fees that are not necessary for medical care.
Once the baby is born, any medical expenses for the baby (rather than the gestational surrogate) are tax deductible, as the baby is the taxpayer’s dependent. Thus, it is helpful to ask the clinic and/or hospital to separate expenses for the surrogate and expenses for the baby.
Things to Consider…
To be tax efficient, you may try to bundle expenses (surrogacy as well as other medical expenses) into one year. That way you don’t have to reach the 7.5% threshold in two consecutive years, for example.
Surrogacy related expenses may take you over the 7.5% threshold, but keep in mind that ALL medical expenses are deductibles. So don’t forget your dental charges, prescription contacts, mileage for travel to the doctor’s offices, insurance premiums, deductibles, etc. Publication 502 includes a longer list of deductions that are includable here.
Baby sitting expenses, even from a qualified nurse, and even if your baby was in the NICU, are not deductible. Unless the baby sitter is providing nursing services as defined by the IRS, which generally means doing something the doctor specifically prescribed.
Note that there are adoption related tax credits, but they do not apply to surrogacy.
Tax preparers probably don’t have a lot experience in this area. So bringing in this article may be helpful.