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Tax Day – Can You Deduct Your Surrogacy Expenses?

April 4, 2013

It’s almost Tax Day. Can You Deduct Your Surrogacy Expenses? It Might Depend on Whether You are Gay or Straight
 
With Tax Day less than two weeks away, much attention is focused on tax preparations.  For those who have gone through Assisted Reproductive Technology, the question arises:  Are any of these expenses deductible?
 
Before I start writing, let me make one thing clear:  I am NOT a tax attorney.  I am NOT a tax expert.  I still remember throwing my tax text book and all of my notes (I’m old enough to have gone to law school in the days before laptops) into the middle of Harvard Square the night before my final exam, proclaiming “I hate Taxes!”
 
So, with the caveat that I am not giving any tax advice whatsoever, I proceed:
 
Egg Donors:  In 2003,there was an IRS private letter ruling concluding that the expenses relating to the use of an egg donor by a taxpayer suffering from infertility were deductible as a medical expense.  (To be deductible, the taxpayer’s total medical expenses must exceed 7.5% of income.)  The IRS included, as medical expenses: the fee to the egg donor, the agency’s fee, the fees paid for psychological testing and legal fees, and the fees for insurance.  Theoretically, private letter rulings do not have a precedent effect for others, but it is the letter that is widely followed in the assisted reproduction industry.
 
Surrogates:  The use of surrogates has been much more controversial and contested by the IRS.  The IRS’s argument against the deductibility of these expenses has been a little bit like the classic “hide the pea” game.  First, the IRS argued that surrogacy did not involve any disease, ignoring the multitude of opinions that infertility is indeed a disease.   Then, realizing that this argument was a failing proposition, the IRS shifted its argument to claim that because the medical care affected a third person, the surrogate, it did not qualify as medical care.  That argument has soundly been rejected in other contexts, however.  E.g., taxpayers are allowed to deduct the expenses of human note-takers for deaf students, as well as the expenses incurred by their kidney donors.
 
See, generally, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1478225.
Therefore, tax analysts believe that Tax Court rulings suggest that surrogacy expenses, such as those in the 2003 Egg Donor ruling – specifically, all of the surrogate’s medical expenses, insurance expenses, legal expenses, any fee to the surrogate, plus the agency fee, would all be deductible medical expenses.  Id. Given that surrogacy can cost $75,000, this would constitute a considerable saving to the taxpayer.
 
These same tax analysts seem worried, however, that the Tax Court has excluded same-sex couples from this analysis.  Stated differently, only mixed couples are currently entitled to the tax deduction.
 
http://www.ustaxcourt.gov/InOpHistoric/magdalin.TC...
 
Indeed, one tax analyst worries that this discriminatory treatment would continue even if DOMA is struck down by the US Supreme Court.
 
http://www.bna.com/doma-overturned-enough-b1717987...
 
Such a result would be outrageous and untenable.  Hopefully, many same-sex married couples would then step up to challenge it, hopefully with the assistance of an entity like Lambda Legal.
 
So, let’s start with where I began.  I am not a tax expert.  I truly hope the tax analysts are right that all surrogacy expenses can be deducted.  I further hope that the analysts are wrong and, if DOMA is struck down – which I hope it will be – then all taxpayers will be able to deduct their surrogacy expenses, whether gay or straight.