Surrogacy is a way for people to become parents, but it comes with big financial costs. It’s key to know how taxes work for these costs.
Expenses can include medical bills, legal fees, agency costs, and money paid to the surrogate. But, the IRS doesn’t clearly say if you can deduct these costs.
It’s important to understand the tax rules, especially IRC Section 213. This section lets you deduct medical costs that are more than 7.5% of your income after taxes.
Parents and surrogates need to think about how taxes affect surrogacy. The money the surrogate gets is usually taxed. This guide will help you understand the different costs of surrogacy, the tax rules, and if you can get a tax break. It aims to make the complex world of surrogacy and taxes easier to handle.
Key Takeaways
- Surrogacy involves a range of costs, including medical expenses, legal fees, agency fees, and surrogate compensation.
- Medical expenses for surrogacy may qualify for tax deduction under IRC Section 213 if they meet specific criteria.
- The IRS allows taxpayers to deduct medical expenses that exceed 7.5% of their adjusted gross income (AGI).
- Expenses directly related to the surrogate’s pregnancy, such as medical appointments, procedures, and prescribed medications, may be deductible.
- Surrogate compensation and certain agency fees are generally not considered deductible medical expenses.
Understanding Surrogacy Expenses and Tax Implications
Surrogacy can be financially complex. Knowing about tax implications is key. Surrogacy costs include medical, legal, agency fees, and the surrogate’s compensation. Some of these can be deducted from taxes, but the rules are detailed.
Common Types of Surrogacy Costs
Medical expenses: Doctor visits, fertility treatments, medications, and travel related to the surrogacy process.- Legal fees: Negotiating and drafting contracts, ensuring legal compliance, and managing the legal aspects of the surrogacy arrangement.
- Agency fees: Matching services, coordination, and administrative support provided by surrogacy agencies.
- Surrogate compensation: Base pay for the surrogate mother, as well as additional payments for special circumstances or complications.
Basic Tax Principles for Medical Expenses
IRC Section 213 lets you deduct medical expenses over 7.5% of your AGI. These costs must be for diagnosing, treating, or preventing disease, or for body structure or function.
The 7.5% AGI Threshold Explained
The 7.5% AGI threshold means you can deduct medical expenses over 7.5% of your AGI. For instance, if your AGI is $100,000 and medical expenses are $10,000, you can deduct $2,500. This is the amount over 7.5% of your AGI.
| Adjusted Gross Income (AGI) | Total Medical Expenses | Deductible Amount |
| $100,000 | $10,000 | $2,500 |
| $80,000 | $8,000 | $1,000 |
| $120,000 | $12,000 | $3,000 |
When claiming surrogacy-related expenses for taxes, keep detailed records. You’ll need receipts and invoices for the IRS if asked.
Are Surrogacy Costs Tax Deductible
Understanding if surrogacy costs are tax deductible is tricky. Some medical costs from the surrogate’s pregnancy might be deductible. But, it’s not that simple. The Internal Revenue Code says you can only deduct medical expenses that are more than 7.5% of your adjusted gross income (AGI).
Expenses for third parties, like the surrogate, usually aren’t deductible. This is unless they directly affect the taxpayer’s body. Cases like Magdalin v. Commissioner and PLR 202114001 support this rule. Expenses that don’t qualify include the surrogate’s pay, her medical bills, health insurance, and agency fees not tied to medical care.
Same-sex couples have had a hard time getting these expenses deducted. This is because of how the IRS defines medical care. But, a new bill called the Equal Access to Reproductive Care Act could change this. It was introduced by Rep. Adam Schiff and Rep. Judy Chu. It aims to let surrogacy costs be medical care deductions, no matter the surrogate’s status or the intended parents’ health.
To figure out what surrogacy costs might be deductible, it’s best to talk to a tax expert, a doctor, and maybe a tax lawyer. They can give advice based on your infertility history and your surrogacy plan.
Medical Expenses That Qualify for Tax Deductions
Many people don’t know about tax deductions for surrogacy and fertility treatments. These deductions can save a lot of money. They help cover the high costs of starting a family through assisted reproductive techniques.
IVF and Fertility Treatment Deductions
IVF, egg retrieval, and other fertility treatments might be tax deductible. They must meet the “medical care” criteria of Section 213. This includes costs for procedures, medications, equipment, and therapy. The main rule is that these expenses must help with a physical or mental disability or illness.
Travel and Accommodation Expenses
Travel costs for medical care can also be tax deductible. This is great for those who travel for specialized fertility treatments or surrogacy services.
Insurance-Related Deductions
Health insurance premiums, including long-term care, can be deducted. This is a big help for families dealing with surrogacy or fertility treatments.
Remember, tax deductions vary by person. It’s wise to get professional tax advice. This way, families can handle the financial stress of starting a family through assisted reproductive technologies.
Legal Framework for Surrogacy Tax Benefits
IRC Section 213 is the main rule for surrogacy tax deductions. It lets you deduct medical expenses that are more than 7.5% of your Adjusted Gross Income (AGI). These expenses must be for diagnosing, treating, or preventing disease, or for treatments that affect your body’s structure or function.
The rules for surrogacy tax benefits are not clear. The IRS says most costs for same-sex couples using a gestational surrogate are not deductible. This is because they don’t fit the IRS’s definition of “medical expenses” under Section 213. A private letter ruling from the IRS on January 12, 2021, explains this.
But, the IRS does consider some costs deductible. For example, expenses for sperm donation and freezing are seen as “medical care” under Code Section 213. This shows how complex the rules are for medical expenses tax breaks for surrogacy and surrogacy financial assistance tax implications.
Deducting gestational carrier costs tax deductibility is not easy. It might need a Private Letter Ruling from the IRS to qualify certain expenses. If you’re trying to deduct surrogacy costs, keep detailed records. Also, talk to a tax expert to make sure you follow the rules.
Documenting Surrogacy Expenses for Tax Purposes
When you claim surrogacy-related expenses on your taxes, keeping good records is key. You should save all medical bills, receipts, and advice from professionals. This helps prove your claim and can avoid IRS questions. Remember, only expenses from the tax year you’re filing for can be deducted, no matter when they were paid.
Required Documentation and Records
To get the most tax savings from your surrogacy journey, keep detailed records. This includes:
- Medical bills and receipts for fertility treatments, IVF procedures, and other surrogacy-related medical care
- Invoices and documentation from surrogacy agencies, clinics, and legal professionals
- Receipts for travel, accommodation, and other out-of-pocket costs associated with the surrogacy process
Timeline for Tax Filing
Remember, you can only deduct surrogacy expenses in the year they were paid, not when the services were given. Make sure to organize and submit all your documents when you file your taxes. This way, you can claim your deductions correctly.
Professional Assistance Recommendations
Surrogacy tax laws can be tricky. It’s wise to talk to a certified public accountant (CPA) or tax expert who knows about surrogacy taxes. They can figure out which expenses you can deduct, help with Private Letter Rulings if needed, and ensure you follow tax laws.
This way, you can get the most tax savings for your deducting surrogacy fees on taxes and surrogacy tax credits, leading to tax savings for surrogacy journey.
| Surrogacy Expense Type | Tax Deductibility |
| Medical Expenses (IVF, fertility treatments) | Potentially deductible if they exceed 7.5% of adjusted gross income |
| Legal Fees (medical advice, treatments) | May qualify as deductible medical expenses |
| Agency Costs (directly related to medical services) | Potentially deductible as medical expenses |
| Surrogate Mother Compensation | Not tax-deductible |
Tax Implications for Surrogate Mothers
Surrogate mothers must report their compensation as taxable income. This compensation usually includes a base payment of about $30,000 plus extra benefits. They might get a 1099-MISC form from the intended parents or the agency, showing it’s taxable income.
Even without a 1099-MISC, they still have to report it as income. Some try to say it’s pre-birth child support, compensation for pain, or gifts to lower taxes. But the IRS might not agree with these claims.
It’s very important for surrogate mothers to talk to a tax expert. A CPA or tax attorney can help them report their income right and understand tax rules. Keeping good records is key to handling surrogacy taxes.
Conclusion
Understanding the taxes of surrogacy can be tricky. Some medical costs, like IVF, might be tax-deductible. But, most surrogacy expenses don’t qualify under IRS rules.
Parents-to-be need to keep detailed records of their surrogacy costs. They should also talk to tax experts or get a Private Letter Ruling. This way, they can get the most tax benefits while following the law. Surrogate mothers, on the other hand, have to pay taxes on their earnings.
The laws around surrogacy are changing. It’s important for those involved to stay updated and get advice from tax pros. Knowing about surrogacy tax deductions helps families plan better. This way, they can handle surrogacy legal guidance, surrogacy financial planning, and tax advantages of surrogacy more effectively.
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FAQs
Are surrogacy costs tax deductible?
The rules for deducting surrogacy costs are complex. You might deduct medical expenses related to the surrogate’s pregnancy if they meet IRC Section 213. But, expenses for third parties, like the surrogate, usually don’t qualify unless they affect your body directly.
What types of surrogacy expenses may be tax-deductible?
You can deduct medical expenses under IRC Section 213. This includes payments to doctors, hospital bills, and prescription drugs. You can also deduct travel costs for medical care, like gas, hotel, and food.
How does the 7.5% AGI threshold affect the deductibility of surrogacy expenses?
The IRS lets you deduct medical expenses over 7.5% of your adjusted gross income (AGI). So, only the extra costs of surrogacy-related medical expenses can be deducted.
Can IVF and fertility treatments be deducted for surrogacy?
Yes, IVF and fertility treatments might be deductible. They must fit the criteria for medical care under Section 213. This includes costs for diagnosis, treatment, or prevention of disease.
How should surrogate mothers report their compensation on taxes?
Surrogate mothers must report their pay as taxable income. The pay includes a base amount and extra benefits. They might get a 1099-MISC form from the intended parents or agency, showing the pay is taxable.
What is the role of Private Letter Rulings (PLRs) in surrogacy tax deductions?
A PLR can offer guidance on deducting surrogacy expenses. But, it’s not binding for others. Important cases and rulings, like Magdalin v. Commissioner and PLR 202114001, have helped clarify what’s deductible.
What documentation is required for claiming surrogacy-related tax deductions?
You need good records, like receipts and invoices, to claim surrogacy deductions. Keep detailed records of medical expenses. Make sure to deduct them in the right tax year.
Source Links
- https://dimovtax.com/claiming-surrogacy-related-expenses/ – Claiming Surrogacy-Related Expenses | Dimov Tax & CPA Services
- https://surrogacybyfaith.com/how-surrogacy-works/can-you-claim-surrogacy-on-taxes/ – Can You Claim Surrogacy on Taxes? – Surrogacy by Faith
- https://ktslaw.com/en/Blog/ERISA/2023/1/Taxation-of-Infertility-Treatments-and-Surrogacy-Benefits – Taxation of Infertility Treatments and Surrogacy Benefits