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Claiming Surrogacy-Related Expenses

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Claiming Surrogacy-Related Expenses: A Comprehensive Guide

Introduction

Surrogacy provides a vital pathway to parenthood for many individuals and couples, yet it also introduces a myriad of financial responsibilities and considerations. Among these, understanding how to handle surrogacy-related expenses from a tax perspective is essential for managing overall costs effectively. As surrogacy becomes more prevalent, the financial aspects, particularly tax implications, require careful attention to ensure compliance and optimize potential benefits.

Surrogacy involves various expenses that can quickly accumulate, including medical treatments, legal fees, agency costs and surrogate compensation. These costs can be overwhelming, making it crucial for intended parents and surrogates to understand which expenses may be deductible and how to claim these deductions appropriately. However, the IRS does not provide explicit guidance on surrogacy expenses, leading to a complex landscape that requires thorough knowledge and strategic planning.

For intended parents, some surrogacy-related expenses might be considered deductible medical expenses under the Internal Revenue Code (IRC) Section 213. This section allows for the deduction of medical expenses that exceed 7.5% of adjusted gross income (AGI). Yet, determining which surrogacy expenses qualify for this deduction can be intricate, necessitating a detailed examination of IRS regulations and, in some cases, obtaining a Private Letter Ruling (PLR) for specific guidance.

Both intended parents and surrogates must navigate these tax considerations with precision. For surrogates, compensation received is generally considered taxable income, which must be reported and may be subject to self-employment taxes. This aspect underscores the importance of meticulous record-keeping and consultation with tax professionals.

Dimov Tax & CPA Services aims to provide clarity and support for those involved in surrogacy. By offering expert advice and tailored services, we help clients manage their surrogacy-related financial responsibilities effectively, ensuring compliance with tax laws and maximizing potential deductions.

This article delves into the specific regulations governing surrogacy-related tax deductions, outlines the types of expenses that qualify for deductions, and provides a step-by-step guide on claiming these expenses. 

Surrogacy-Related Expenses

Surrogacy encompasses a variety of costs, which can be broadly categorized into medical expenses, legal fees, agency fees, and surrogate compensation. Each of these categories includes several specific expenses that intended parents and surrogates need to consider:

  1. Medical Expenses:
    • Medical appointments and procedures related to the surrogate’s pregnancy.
    • Prescribed medications and prenatal vitamins.
    • Maternity clothing required due to physical changes during pregnancy.
    • Travel expenses for medical appointments, including transportation, accommodation, and meals.
  2. Legal and Agency Fees:
    • Fees paid to surrogacy agencies for matching services, coordination, and support.
    • Legal fees for drafting surrogacy agreements and handling the legal aspects of the surrogacy process.
  3. Surrogate Compensation:
    • Base compensation for the surrogate.
    • Additional payments for special circumstances, such as carrying multiples or undergoing a cesarean section.
  4. Other Related Costs:
    • Insurance premiums for the surrogate’s health coverage.
    • Miscellaneous expenses such as childcare for the surrogate’s children during medical appointments.

Regulations Governing Surrogacy-Related Tax Deductions

The primary regulation governing the deduction of surrogacy-related expenses is Section 213 of the Internal Revenue Code (IRC). According to IRC Section 213, taxpayers can deduct medical expenses that exceed 7.5% of their adjusted gross income (AGI). These medical expenses must be primarily for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.

Deductibility Criteria

Under Section 213(d)(1)(A), medical care includes amounts paid for:

  • Diagnosis, cure, mitigation, treatment or prevention of disease.
  • Treatments affecting any structure or function of the body.

The IRS has issued various rulings and guidelines to clarify which expenses qualify under this section. For instance, IRS Publication 502 outlines that expenses for medical treatments, prescribed medications, and certain travel costs associated with medical care may be deductible.

Specific Guidance on Surrogacy-Related Expenses

  1. Medical Expenses: Medical expenses directly related to the surrogate’s pregnancy, such as medical appointments, procedures, prescribed medications and prenatal vitamins, may qualify for deduction if they meet the criteria under Section 213. However, costs related to third parties (e.g., the surrogate) generally do not qualify unless they directly affect the taxpayer’s body.
  2. Non-Deductible Expenses: Expenses such as surrogate compensation, the surrogate’s medical bills, health insurance premiums and agency fees not directly related to medical procedures are typically non-deductible. This stance was reinforced in cases like Magdalin v. Commissioner and PLR 202114001, where the IRS ruled that surrogacy expenses for third parties do not qualify as medical care under Section 213​.

Private Letter Rulings (PLRs)

Obtaining a Private Letter Ruling (PLR) from the IRS can provide specific guidance on the deductibility of certain surrogacy-related expenses. A PLR is a written decision by the IRS on how the tax laws apply to a taxpayer’s specific situation. For surrogacy, a PLR can help clarify which expenses can be deducted, but it is not precedential for other taxpayers.

Key Case Law and Rulings

  • Magdalin v. Commissioner: This case confirmed that surrogacy-related expenses incurred by a taxpayer for procedures involving third parties (e.g., egg donors, surrogates) are not deductible.
  • PLR 202114001: This ruling emphasized that expenses related to egg retrieval, IVF procedures and surrogacy for third parties do not qualify as deductible medical expenses under Section 213​.

Importance of Proper Documentation

Proper documentation is crucial when claiming deductions for surrogacy-related expenses. Taxpayers should maintain detailed records of all medical expenses, including receipts, invoices and professional advice. This documentation supports the claim and helps navigate potential IRS scrutiny.

Qualifying Medical Expenses

Under the Internal Revenue Code (IRC) Section 213, medical expenses can be deducted if they exceed 7.5% of a taxpayer’s adjusted gross income (AGI) and meet certain criteria. The expenses must be primarily for the prevention or alleviation of a physical or mental defect or illness. Here is a detailed explanation of what qualifies as a deductible medical expense:

General Criteria

  1. Primary Purpose:
    • The expense must be primarily for the diagnosis, cure, mitigation, treatment, or prevention of disease or for treatments affecting any structure or function of the body.
  2. Paid During the Tax Year:
    • Only expenses paid during the tax year are deductible, regardless of when the services were provided.
  3. Not Compensated by Insurance:
    • The expenses must not be compensated for by insurance or other sources.

Examples of Deductible Medical Expenses

  1. Medical and Dental Services:
    • Payments to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists and other medical practitioners.
  2. Hospital Services:
    • Costs of inpatient care, including meals and lodging provided by a hospital or similar institution.
  3. Prescription Medications:
    • Costs of medications prescribed by a doctor, including insulin.
  4. Medical Equipment and Supplies:
    • Payments for medical equipment, supplies and diagnostic devices needed for medical care, such as wheelchairs, crutches and blood sugar test kits for diabetics.
  5. Health Insurance Premiums:
    • Premiums for policies that cover medical care, including Medicare Part B and D premiums. However, premiums for life insurance or income protection policies are not deductible.
  6. Travel for Medical Care:
    • Expenses for transportation primarily for and essential to medical care, including mileage for the use of a personal car, bus, taxi, train or air travel. Lodging expenses are also deductible if certain conditions are met.
  7. Home Modifications:
    • Costs of home improvements if their main purpose is medical care, such as constructing ramps, widening doorways or installing railings for individuals with disabilities. The cost of these improvements, minus any increase in home value, can be deducted.

Surrogacy-Related Medical Expenses

Specific guidance on surrogacy-related medical expenses is more nuanced and requires careful consideration:

  1. Qualifying Expenses:
    • Medical procedures directly related to the surrogate’s pregnancy may be deductible if they meet the criteria under Section 213. These include:
      • Medical appointments and procedures related to pregnancy.
      • Prescribed medications and prenatal vitamins.
      • Travel expenses for medical appointments (transportation, lodging, and meals).
  2. Non-Qualifying Expenses:
    • Expenses for third parties (e.g., the surrogate) that do not directly affect the taxpayer’s body are generally non-deductible. This includes:
      • Surrogate compensation.
      • Surrogate’s medical bills and health insurance premiums.
      • Agency fees not directly related to medical procedures.

Deductibility

A detailed breakdown of deductible and non-deductible based on current IRS regulations and tax guidelines is presented below:

Deductible Expenses

Under IRC Section 213, medical expenses can be deducted if they exceed 7.5% of the taxpayer’s adjusted gross income (AGI) and are primarily for the prevention or alleviation of a physical or mental defect or illness. Here are the surrogacy-related expenses that might qualify:

  1. Medical Procedures and Treatments:
    • Fertility Treatments: Costs related to in vitro fertilization (IVF), including egg retrieval and sperm donation, provided these expenses directly affect the taxpayer or their spouse.
    • Medical Appointments and Procedures: Regular check-ups, specialized consultations, and necessary medical procedures related to the surrogate’s pregnancy.
    • Prescribed Medications and Prenatal Vitamins: Supplements and medications prescribed for the health and well-being of the pregnancy.
  2. Travel Expenses for Medical Care:
    • Transportation: Costs incurred for transportation to and from medical appointments, including fuel, public transit and airfare.
    • Lodging: Costs of lodging if overnight stays are required due to distant medical visits or procedures directly related to surrogacy.
    • Meals: Reasonable costs of meals during travel for medical appointments or procedures, within IRS limits.
  3. Home Modifications:
    • Expenses for home improvements necessary for medical care, such as constructing ramps or modifying bathrooms, provided they are primarily for the medical care of the taxpayer, spouse or dependent.
  4. Insurance Premiums:
    • Premiums for health insurance policies that cover medical care, including specific policies related to surrogacy if they meet the necessary criteria.

Non-Deductible Expenses

Certain expenses related to surrogacy do not qualify as deductible under current IRS guidelines. These include:

  1. Surrogate Compensation:
    • Payments made directly to the surrogate for her services are not deductible. This includes base compensation and any additional payments for specific conditions such as carrying multiples or undergoing a cesarean section​.
  2. Surrogate’s Medical Bills and Health Insurance Premiums:
    • Medical bills and health insurance premiums paid for the surrogate are considered non-deductible, as they do not directly affect the taxpayer, spouse or dependent’s body​.
  3. Agency Fees:
    • Fees paid to surrogacy agencies for matching services, coordination and support that are not directly related to medical procedures are non-deductible. This includes general administrative fees charged by the agency​.
  4. Legal Fees:
    • Legal fees related to drafting surrogacy agreements and handling the legal aspects of the surrogacy process, unless they are specifically tied to medical advice or treatments that meet the criteria under IRC Section 213.
  5. Miscellaneous Costs:
    • Costs such as childcare for the surrogate’s children during medical appointments, maternity clothing and other personal expenses related to the surrogate’s pregnancy are generally non-deductible.

Obtaining a Private Letter Ruling (PLR)

When dealing with surrogacy-related expenses or other costs that are not clearly addressed by existing tax laws, taxpayers may seek clarity from the IRS through a Private Letter Ruling (PLR). A PLR is an official written decision by the IRS in response to a taxpayer’s request for guidance on how tax laws apply to their specific situation. Here’s a comprehensive guide to understanding and obtaining a PLR.

What is a Private Letter Ruling (PLR)?

A Private Letter Ruling is a written statement issued by the IRS to a taxpayer. It clarifies the IRS’s position on how specific provisions of the tax law apply to the taxpayer’s unique set of facts. While PLRs provide definitive answers for the taxpayer requesting them, they cannot be cited as precedent by other taxpayers.

Why Obtain a PLR?

Taxpayers seek PLRs to:

  • Resolve ambiguities in tax laws.
  • Gain certainty and avoid potential disputes with the IRS.
  • Ensure that their tax filings comply with IRS regulations.

For surrogacy-related expenses, a PLR can provide clear guidance on which expenses can be deducted as medical expenses under IRC Section 213, particularly when these expenses are not explicitly covered by existing IRS guidelines.

Steps to Obtain a Private Letter Ruling

  1. Preparation of the Request:
    • Detailed Description: A comprehensive description of the facts and circumstances related to the expenses should be prepared. This should include detailed information about the surrogacy arrangement, the specific expenses incurred and the taxpayer’s rationale for why these expenses should be deductible.
    • Legal Analysis: Provide a legal analysis explaining why the expenses should qualify as deductible medical expenses under IRC Section 213. This may involve citing relevant tax code sections, Treasury Regulations, court cases and previous PLRs.
    • Supporting Documentation: All relevant documents must be included, such as contracts with the surrogacy agency, medical bills, receipts and any correspondence with medical professionals or legal advisors.
  2. Submission to the IRS:
    • Formal Letter: A formal letter requesting the ruling should be drafted and addressed to the appropriate IRS office. The letter should clearly state the taxpayer’s request and include all the prepared descriptions, analyses and documents.
    • Filing Fee: The required user fee must be paid. The amount varies depending on the complexity of the request and the taxpayer’s circumstances.
  3. IRS Review Process:
    • Acknowledgment: Upon receiving the request, the IRS will acknowledge it and may request additional information or clarification.
    • Evaluation: The IRS will evaluate the request, considering all provided information and conducting any necessary internal consultations.
    • Issuance of Ruling: After the evaluation, the IRS will issue a written ruling. This ruling will provide specific guidance on how the tax laws apply to the taxpayer’s situation.
  4. Implementation:
    • Compliance: The taxpayer must follow the guidance provided in the PLR when preparing their tax returns.
    • Attachment to Tax Return: The PLR should be attached to the taxpayer’s tax return to substantiate the deductions claimed.

Professional Assistance

Given the complexities and nuances of surrogacy-related tax deductions, consulting with tax professionals specializing in this area is essential. Dimov Tax & CPA Services can provide tailored advice, assist in preparing documentation and help obtain PLRs if necessary, ensuring compliance with IRS regulations and maximizing potential deductions​. 

Key Takeaways

  1. Medical Expenses: Only those directly related to the surrogate’s pregnancy and health are deductible.
  2. Non-Deductible Expenses: Surrogate compensation and non-medical-related fees are not deductible.
  3. PLR for Clarification: A Private Letter Ruling can provide definitive guidance on the deductibility of specific expenses.
  4. Documentation: Keep meticulous records of all expenses, receipts and professional consultations.
  5. Professional Advice: Engaging a tax professional is crucial for navigating the complex tax landscape of surrogacy.

Conclusion

While surrogacy-related expenses can be daunting, understanding the tax implications and available deductions can provide significant financial relief. By consulting with experienced tax professionals and meticulously documenting all expenses, intended parents and surrogates can navigate this complex landscape with confidence. Dimov Tax & CPA Services is dedicated to providing the expertise needed to ensure compliance and maximize potential tax benefits.

For further guidance and professional tax support, contact Dimov Tax & CPA Services today.

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