Whether you are an intended parent embarking on your surrogacy journey or someone considering surrogacy for the first time, you will find yourself asking the question, “Do I have to pay taxes on this?” Surrogacy is an involved financial decision involving a range of expenses and payments including fertility treatments for intended parents—such as in vitro fertilization (IVF), sperm donation, and egg donation—and range of medical services for surrogates, including physiological and psychological screening, intrauterine insemination (IUI) or IVF, pregnancy testing, and gynecological and obstetric exams.
Surrogates will incur their own medical expenses—many of which are covered by insurance or the intended parents through the mediating surrogacy agency—as well as travel and legal expenses. Finally, surrogates may need to take time off work for appointments and maternity, though they may receive generous compensation for their time and services. Additionally, intended parents’ expenses include the surrogacy agency’s oversight, counseling and guidance; the surrogate’s time and services; and legal services for drafting, signing, and maintaining a surrogacy contract.
In short, when it comes to surrogacy, the answer to the question, “Do I have to pay taxes on this?” is, “It depends.” Tax laws surrounding surrogacy are still unformed and fluid—they shift and change every year as families and surrogates push for fairer tax laws, set new precedents, and reinterpret existing tax laws. The following overview explores the basics of surrogacy expenses, benefits, income, and tax law, but it should not serve as a replacement for the oversight of a certified public accountant or tax professional. If you are an intended parent or surrogate, consider consulting a tax professional before filing your taxes.
What Do Surrogates Pay Taxes On?
Undertaking the role of a surrogate mother can implicate several legal and financial questions, including whether your payments—typically made by intended parents through a surrogacy agency—will be taxed by the state and federal government. Before addressing how these payments are taxed, it’s important to explore how much surrogates might receive and what expenses they might accrue as well as which of these expenses will be covered by insurance.
How Much Do Surrogates Make?
Many people become surrogates for the emotional and spiritual satisfaction of bringing a life into the world and helping another family grow and fulfill their dreams of parenthood. However, surrogates are often generously compensated for their services, though the precise size of payments varies by state, agency, and contract.
Generally, surrogates can expect a base payment of around $30,000 in addition to benefits and compensation amounting to another $10,000–$20,000. These payments are intended to cover the physical and mental labor involved in carrying a child as well as time the surrogate may have to take off work for screening, medical appointments, and maternity—medical expenses are not taken from this fee. The pacing and amount of these payments will be agreed upon with legal consultation and specified in the surrogacy contract.
What Expenses Should Surrogates Expect?
In the vast majority of arrangements, surrogates are not responsible for any psychological or physical screening fees, surrogacy agency costs, or counseling service expenses. While fertility treatments for intended parents—such as IVF, sperm donation, or egg donation—are covered by the intended parents, a surrogate’s obstetric appointments, ultrasounds, and labor and delivery fees should be covered by the surrogate’s personal health insurance company.
The only fee surrogates may anticipate is the cost of hiring a lawyer to represent their interests when drafting, signing, and maintaining a surrogacy contract. The surrogate and intended parents should always have separate lawyers to represent their respective interests, except in the rare instance when a surrogate declines representation, either because they are an experienced surrogate with a contract they trust or when the intended parents are close, trusted family members. Even in these instances, it is recommended that the surrogate hire their own legal representation. However, in most instances, intended parents will cover the cost of legal fees for the surrogate.
Is Surrogacy Taxable Income?
The short answer to the question, “Is surrogacy taxable income?” is, “Yes.” Generally, the federal government requires that a surrogate mother pay taxes on the pay received from the intended parents. Generally, states also require a surrogate mother to claim their income. However, all or portions of the payment can be considered tax-deductible in certain circumstances.
The first step in figuring out if you need to pay taxes on your surrogacy payment is determining whether or not the intended parents (or the surrogacy agency, on their behalf) have issued you a 1099-MISC form. The 1099-MISC form is a document indicating the intended parents plan to report their payment to you as a form of taxable miscellany, and therefore, you must report the payments as taxable income.
If you do not receive a 1099-MISC form, this does not necessarily indicate that you are not responsible for paying taxes or that the surrogacy payments are tax-deductible—it simply means that the intended parents have decided not to exchange federal tax forms. In this case, you should consult a tax professional about your tax obligations.
Is a surrogate responsible for paying income taxes?
While surrogacy compensation is considered taxable income in almost all cases, surrogates are not always responsible for shouldering the entirety of the financial burden. When negotiating the surrogacy contract, the lawyer representing the surrogate’s interests can suggest including a clause holding the intended parents responsible for paying surrogacy income taxes on the surrogate’s behalf. If the intended parents agree to this clause, they will pay the additional cost of covering the surrogate’s income taxes, and the surrogate will not be responsible.
In the case where a surrogate agrees to a surrogacy contract without this clause, there are still some options for reducing the burden of surrogacy income taxes. While there are no legal precedents or tax laws guaranteeing these exemptions, professionals will typically make one of the three following claims to pursue potential exemptions:
Claim #1: “Surrogacy payments are pre-birth child support”
Tax professionals might claim that surrogacy compensation is a form of pre-birth child support in which intended parents compensate the surrogate for “caring” for their unborn child. While this approach has worked in individual instances, those cases are not formal legal precedents. In the event this claim is accepted, the surrogacy compensation would not be taxed because child support is tax-exempt.
Claim #2: “Surrogacy payments are for pain”
Surrogacy can be physically, mentally, and emotionally demanding; therefore, some tax professionals may claim the payment intended parents issue to surrogates is compensation for that “pain and suffering.” Because payments made to compensate for pain and suffering are legally tax-exempt, surrogates successful in pursuing this route would not be responsible for paying taxes on the payments they receive from intended parents. However, this approach is complicated by the fact that the surrogate consented to the “pain and suffering” by signing a contract and voluntarily entering into the pregnancy.
Claim #3: “Surrogacy payments are a gift”
Because surrogacy is not clear-cut labor or employment, compensation for surrogacy can be considered a gift. While tax professionals have successfully made this claim, the IRS has not formally recognized surrogacy compensation as a “gift” by definition, so the claim may be denied. Additionally, as of 2021, the annual gift tax exclusion is $15,000, and most surrogacy compensations exceed this amount. In the instance that your claim is approved, the tax-exemption would only extend to a portion of your surrogacy payment, and you would be responsible for paying income taxes on the remainder of the amount.
Is Surrogacy Tax Deductible?
Although it’s not advisable to start the surrogacy journal from a purely financial point of view, it is good to know if certain expenses associated with surrogacy are tax deductible. In this section, we’ll go over tax deductions for intended parents and surrogate mothers to ensure that everyone involved in the process knows exactly what to claim come tax season.
Is Surrogacy Tax-Deductible For Intended Parents?
In light of the 2017 Tax and Jobs Cuts Act, the answer to the question, “Is surrogacy tax deductible for intended parents?” is, “Yes and no.” When determining whether surrogacy expenses are tax deductible, intended parents should first determine the extent of the expenses—in other words, how much did you pay throughout your surrogacy journey? Next, intended parents should assess their adjusted gross income (AGI) and the tax-deductible status of each service they paid for—the intended parent or parents’ AGI and the nature of the expense informs what portion of their surrogacy expenses are taxable.
Is Surrogacy Tax-Deductible For Surrogate Mothers?
Surrogacy expenses are typically not eligible for tax deduction for surrogate mothers in the United States. This is because the expenses in using a surrogate are not for medical procedures performed on the bodies of Intended Parents, who are the taxpayers. Instead, surrogacy requires the participation of a third party.
The IRS does not classify surrogacy as a medical expense unless it can be proven that the procedure is medically necessary to address a specific fertility issue for the intended parents. Surrogacy arrangements are considered contractual agreements rather than medical treatments, thus falling outside the scope of deductible medical expenses for surrogate mothers.
While costs related to medical procedures and fertility treatments for the intended parents may be deductible under certain circumstances, surrogate mothers themselves are usually unable to claim such deductions on their taxes. Therefore, surrogacy expenses remain a significant financial consideration for surrogate mothers, which means they should be approached with careful financial planning and consideration.
How Expensive Is Surrogacy?
The cost of surrogacy varies by state, agency, and contract but typically ranges from $50,000–$130,000 and covers matching, screening, medical services, legal services, and surrogate compensation. Increasingly, employers are expanding their benefits to cover the cost of surrogacy for their employees, so inquire with your employer to see if you’re covered. While a surrogate’s insurance may cover the cost of medical expenses, intended parents’ health insurance rarely covers the surrogate compensation itself. However, there are insurance plans specifically for surrogacy, so consult your insurance for plan availability.
Which Surrogacy Expenses Are Tax Deductible?
As of 2021, under federal tax laws, fertility treatments for the taxpayer are considered medical care and are therefore tax-deductible. This stimulation means that egg retrieval, sperm donation and freezing, in vitro fertilization, and any other related fertility services administered to or performed on the intended parents themselves are deducted from tax payments. Additionally, in some cases, this tax-deductible status can be extended to expenses related to the medical treatment of infertility, such as the legal fees incurred when creating a contract with a surrogate. Summarily, surrogacy services directly tied to the intended parents’ bodies are tax-deductible.
Which Surrogacy Expenses Are Not Tax Deductible?
Except in specific circumstances outlined in the next section, all surrogacy services not directly related to the intended parents’ bodies are taxed in full. This means that compensation for your surrogate is not tax deductible. Additionally, the expenses of screening and matching surrogates, the surrogate’s health insurance, the surrogate’s medical bills, and any miscellaneous tests, procedures, or exams performed on the surrogate are not tax-deductible. These expenses are taxed in full because they do not fall under the category of the taxpayer’s personal medical expenses and therefore do not qualify as a medical deduction. Finally, if intended parents agree to compensate the surrogate for the income tax associated with surrogacy compensation in the surrogacy contract, they will be responsible for paying those fees as well.
Can You Write Off IUI On Taxes?
Yes, most often you can write off IUI on your taxes. Fertility treatments are expensive, but luckily there are ways to alleviate some of these expenses through various tax deductions. These include deductions for expenses for fertility treatments such as procedures like IUI and IVF, as well as associated costs like lab fees and the preservation of embryos, eggs, or sperm. Additionally, medications to treat infertility, pregnancy tests, and supplements, such as vitamins prescribed by a medical professional for a diagnosed medical condition, are also often deductible.
How Can Intended Parents Apply For Additional Tax Deductibles?
However, in some circumstances, the expenses associated with the surrogacy process can be tax-deductible. When it comes to applying for tax deductions on surrogacy payments, intended parents must, with the aid of a certified public accountant, contact the IRS via letter to request deductions not specified by federal tax law. The IRS will review the case and respond with their decision. If the IRS gives permission to deduct surrogacy expenses from your taxes, they will do so by issuing a Private Letter Ruling (PLR), which you will attach when submitting your taxes.
How Do You Apply For a PLR?
The premise of the initial letter intended parents submit to the IRS is typically that surrogacy itself constitutes a medical treatment intended to address the taxpayer’s (the intended parent’s) proven infertility and therefore constitutes tax-deductible medical care under Section 213. A successful letter both clearly details all surrogacy expenses and proves the taxpayer’s inability to conceive, carry to term, or safely deliver themselves. Specifically, the intended parent must provide evidence that “due to a structure or function of the body,” they are incapable of having children.
What If The IRS Has Rejected Cases Like Mine?
While there have been cases of the IRS awarding intended parents PLRs and granting tax-deduct status for all surrogacy expenses they incurred, this does not guarantee tax-deductions to future intended parents. Unfortunately, even compelling letters can be rejected at the IRS’s discretion. Historically, the IRS has rejected same-sex couples making this appeal, arguing that the nature of a same-sex relationship does not constitute infertility “due to a structure or function of the body.”
However, because each case is private and unique, PLRs—whether accepting or denying the application—cannot serve as precedents for future cases. In a sense, the lack of precedents can be a source of hope: each case is reviewed with fresh eyes. Even if a case like yours has been rejected in the past, that does necessarily mean yours will be denied.
Start Your Surrogacy Journey with Surrogacy by Faith
Surrogacy by Faith is a Christian faith-based surrogacy agency located in Irvine, California, serving surrogates and intended families up and down the West Coast. We believe that our role as a surrogacy agency is to support the values, hearts, and health of all our clients with compassion, professionalism, and faith. If you have questions about surrogacy, please don’t hesitate to contact us, check out other articles on our blog, or visit our FAQ pages for surrogates or intended parents. If you’re ready to begin your surrogacy journey, get started by filling out an initial inquiry for surrogates or intended parents. We look forward to hearing from you and beginning the incredible journey of surrogacy together.