Can I Deduct Surrogacy Expenses?

Q: Hello, We are a legally married man and man in the state of California and are about to begin our surrogacy journey. We are using a gestational surrogate, an egg donor and my partners sperm. What surrogate medical expenses will be tax deductible when we file our taxes? And will we be able to deduct any other expenses for our gestational carrier?

Thank you, T.K.

 

A: Hi T.K.,

There is good news and bad news. This matter is unexplored and there is not a lot of case law regarding it. There are small cases and specific circumstances that have made it deductible and other non-deductible. Unfortunately, none of them can used as a platform for anyone else to claim deductibility.

First, the bad news. The tax courts have ruled against allowing medical expenses related to egg donation and surrogacy. The most popular case is Morrissey v United States. A homosexual couple made the deduction on their personal returns for their surrogacy costs. The IRS disallowed them because the couple did not have fertility problems and it was an elective process.

There are two major rules for medical deductions.

  1. Medical expenses are directly relatable to the individual, spouse, or dependent.
  2. The costs are necessary

The court does not see a surrogate or unborn child as qualifying for rule 1. This is further complicated by the fact that kidney donors can be compensated and expenses deducted. Surrogacy appears to be a similar medical process but the IRS is specifically ruling against surrogacy.

Homosexual couples also have to prove that the medical costs are necessary for rule 2. Even though it is not possible for a couple in a committed homosexual relationship to conceive children, meaning the costs are necessary, the IRS has not ruled in their favor. The couple would have to prove that it would be impossible for them to have a baby. It would sound easy but many taxpayers have not been able to successfully defend their case.

Now for the good news.

There a few strategies to potentially receive deductibility.

The most effective would be a Private Letter Ruling. This basically means that you are asking the IRS in advance to rule on the deductibility of your specific situation. If they rule in your favor you are guaranteed the deduction. The drawback is that it takes a considerable amount of time. Most couples in the process of surrogacy would not have the time to apply for a private ruling.

The second best would be to use a Flexible Spending Account that is for Medical Expenses. That would take pre-tax income and would allow you to pay the surrogate and medical bills directly from it. It is still complicated from a deductibility standpoint but at least you do not have to report the expenses on Schedule A of your tax return and meet the minimum thresholds.

The third way would be to deduct the expenses on your tax return directly and if they are disallowed, fight them in tax court.

As with every filing you should consult your local CPA. They will be critical in getting you the specific advice for every situation. This is a complex grey area and the law is not concrete yet and still evolving.

—Edward Brockschmidt, CPA & Co-Founder of SeedTrust Escrow

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