Are Surrogacy Expenses Tax Deductible?

The tax deductibility of surrogacy expenses depends on the specific nature of each cost. The Internal Revenue Service (IRS) draws a clear line between expenses for an intended parent’s medical treatment and payments made for the surrogate’s services. This distinction is the primary factor in determining whether a cost can be deducted.

The Medical Expense Deduction Framework

Section 213 of the Internal Revenue Code defines medical care as amounts paid for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” To be eligible, an expense must fit this definition and be for the taxpayer, their spouse, or a dependent. The treatment must directly address a medical condition or affect the body of the person claiming the deduction.

A limitation on this deduction is the Adjusted Gross Income (AGI) threshold. Taxpayers can only deduct the portion of their total medical expenses that exceeds 7.5% of their AGI. For example, with an AGI of $100,000, the first $7,500 of medical expenses are not deductible. If total qualifying medical expenses were $20,000, the deduction would be $12,500. This calculation is performed on Schedule A (Form 1040), Itemized Deductions.

Deductible Surrogacy-Related Medical Costs

Certain costs directly related to treating an intended parent’s medical infertility are generally deductible. These are expenses for procedures performed on the bodies of the intended parents themselves. For instance, costs associated with in vitro fertilization (IVF) cycles for the intended mother, such as egg retrieval, fall into this category. Similarly, expenses for sperm retrieval and analysis for the intended father are considered direct medical care.

These procedures are viewed by the IRS as treatments for infertility, affecting a “structure or function of the body” of the taxpayer or their spouse. Therefore, associated costs like fertility medications, physician fees for these specific procedures, and related laboratory work are considered qualified medical expenses.

Non-Deductible Surrogacy-Related Costs

The majority of costs in a surrogacy arrangement are not deductible for the intended parents. This is because they are payments for services rendered by a third party—the surrogate—rather than direct medical care for the taxpayer. The largest of these non-deductible expenses is the compensation paid to the surrogate for her service of carrying the pregnancy, not for the treatment of the intended parents’ medical condition.

All medical expenses related to the surrogate are also non-deductible for the intended parents. This includes costs for the embryo transfer to the surrogate, her prenatal care, health insurance premiums, and the costs of labor and delivery. The U.S. Tax Court has affirmed this position in cases like Magdalin v. Commissioner, ruling that expenses for third parties do not qualify as the taxpayer’s medical care. This reasoning also extends to non-medical fees, such as payments to surrogacy agencies and legal fees for contracts.

Utilizing HSAs and FSAs for Qualified Expenses

Health Savings Accounts (HSAs) and Flexible Spending Arrangements (FSAs) offer another way to pay for certain surrogacy costs with tax-advantaged dollars. These accounts allow individuals to set aside pre-tax money to pay for qualified medical expenses, which follow the same IRS definition used for the itemized deduction.

This means the same costs that are potentially deductible on a tax return can be paid for using funds from an HSA or FSA, such as the intended parents’ own fertility treatments. Using an HSA or FSA is often more advantageous than an itemized deduction because it provides an immediate tax benefit by reducing taxable income. This benefit applies regardless of whether total medical expenses exceed the 7.5% AGI floor. These funds cannot be used for non-qualified expenses like surrogate compensation or her medical bills.