What Couples Need to Know About Medical Deductions for Surrogacy

In a recent private letter ruling (PLR 202505002, 1/31/25), the IRS clarified that in vitro fertilization (IVF) expenses related to a surrogate are not deductible as medical expenses under the tax code for a married couple. This decision highlights a key limitation in medical expense deductions and underscores ongoing legal ambiguity around reproductive technology expenses.

IRS Ruling Explained

The case involved a married heterosexual couple unable to pursue a traditional pregnancy due to a medical condition. The couple used IVF with the husband’s sperm and a donated egg. A gestational surrogate carried the pregnancy. They sought to deduct various related expenses, including:

1. IVF and embryo creation expenses
2. Surrogate medical expenses and childbirth costs
3. Egg donor expenses
4. Surrogate medical insurance
5. Legal and agency fees

The IRS denied these deductions, citing that the expenses did not qualify as “medical care” for the taxpayers or their dependents. Instead, these expenses involved a third party (the surrogate) whose medical procedures did not directly affect the taxpayers’ bodies.

What Does IRS Publication 502 Say?

According to IRS Publication 502: Medical and Dental Expenses, taxpayers can deduct expenses incurred for the diagnosis, treatment, or prevention of disease, or costs that affect any part of the body. Deductible expenses may include services from physicians and other medical practitioners, as well as medical equipment, supplies, and diagnostic devices.

To qualify for a deduction:

1. The expense must primarily treat or prevent a physical or mental defect.
2. It must directly involve the taxpayer, spouse, or dependent.
3. Non-essential expenses (like vitamins or general health treatments) do not qualify.

The IRS emphasized that surrogate-related IVF expenses affect a third party and therefore fall outside the scope of eligible deductions.

Key Deduction Limitations for IVF and Surrogacy

The IRS’s stance reinforces several important rules for taxpayers navigating medical expense deductions related to fertility treatments:

Eligible for Deduction:

1. IVF expenses directly involving the taxpayer or spouse
2. Sperm donation and related medical costs
3. Egg retrieval and storage costs for a spouse or dependent

Not Eligible for Deduction:

1. Surrogate medical expenses
2. Childbirth costs for a surrogate
3. Surrogate medical insurance
4. Legal and agency fees for surrogacy

Why Every Dollar Matters: The AGI Threshold Rule

Taxpayers can only deduct medical expenses that exceed 7.5% of their adjusted gross income (AGI). For example, if your AGI is $100,000 and you incur $8,000 in qualified medical expenses, you can only deduct $500 ($8,000 minus $7,500). This makes every deductible expense crucial in reducing taxable income.

What This Means for Taxpayers

The IRS’s decision underscores the need for taxpayers to carefully review the deductibility of reproductive technology expenses. While expenses directly involving the taxpayer may qualify, surrogate-related expenses likely won’t.

Tax law in this area continues to evolve. As reproductive technologies advance, future rulings and legislation may provide more clarity.

Seek Expert Tax Advice

Given the complexity of tax rules for IVF and surrogacy expenses, consulting a tax professional or CPA is essential. They can help navigate gray areas and ensure compliance while maximizing eligible deductions.

As a professional – Revolutionize your tax workflow with our complete suite of tools: onboarding links, initial interviews, compliance planning, calendars, messaging, task management, and TaxMan for advanced tax research. Please sign up. Our resource directory also offers valuable links to assist in managing various financial and legal aspects of a business or individual.