Previously in our blog, we have discussed whether egg donor compensation is taxable and whether surrogacy expenses are deductible. In this blog, we will cover if intended parents may deduct expenses for an egg donor as deductible medical care expenses under the 26 U.S. Code Section 213(a). The answer is maybe, and surprisingly, more expenses than those that directly relate to medical expenses.
Under Section 213(a), taxpayers may deduct expenses for medical care that exceed 7.5 percent of adjusted gross income. Medical care can be defined as amounts paid for diagnosis, cure, mitigation, treatment, or prevention of disease, 26 U.S. Code Section 213(d)(1)(a). This code also aims at issues affecting bodily functions or structures. The IRS states that preparatory expenses directly related to a medical procedure may also be deductible.
In the private ruling letter released on May 5, 2003, a taxpayer was seeking deductions for medical expenses when she attempted pregnancy using donated eggs. We can deduce the taxpayer is a woman, because she had previously been unable to become pregnant using her own eggs and sought to implant the fertilized egg into her own body. She requested deductions for (1) the donor’s compensation (described as a fee for her time and expenses), (2) the agency fee for obtaining the donor, (3) expenses for donor’s medical and psychological testing and insurance for post-procedure expenses, and (4) legal fees for preparing a contract with the egg donor. When applying the Tax Code to this taxpayer's situation and expenses incurred in obtaining an egg donor, the IRS concluded that these expenses were closely tied to the medical procedure of assisted reproduction and were fully deductible under Section 213. Even the compensation to the egg donor and the agency fee. The reasoning in the Letter was that these expenses are to facilitate the process of overcoming infertility and achieving pregnancy, directly impacting the taxpayer’s bodily functions and fulfilling the criteria in Section 213.
The ruling in this egg donation letter is a stark contrast to the 2021 Private Letter Ruling on whether surrogacy expenses are deductible. Both rulings address the deductibility of medical expenses associated with assisted reproduction, specifically egg donation and IVF procedures. The 2021 ruling found that expenses incurred on behalf of a third party during gestational surrogacy were not considered deductible medical expenses. The taxpayers in the 2021 ruling were a gay male couple, and the IRS ruled none of their expenses for egg donation and gestational surrogacy could be considered incurred for treatment of a disease or for the purpose of affecting the function of the taxpayer’s body (outside what directly involved their bodies such as the sperm retrieval). In contrast, the 2003 ruling was for a woman, or perhaps a couple that included a woman with an infertility diagnosis. Because she had an infertility diagnosis and intended to implant the resulting embryo(s) into her own body, every expense she requested related to the egg donation was considered incurred for the treatment of a disease.
It might seem hard to reconcile the stark difference in outcome between these two rulings. In the 2003 egg donor ruling which allowed for the deduction of everything, there was a medical diagnosis of infertility. In the 2021 ruling which restricted deductible expenses to those directly affecting the taxpayer's body or the body of the taxpayer’s spouse, there was no medical diagnosis of infertility, but a gay male couple could not produce eggs or have a pregnancy on their own. Thus, the differences in the treatment of deductible expenses may lie in whether there is a medical finding of infertility or rather, a practical or social reason for infertility. If the facts were different and the 2003 taxpayer pursued surrogacy rather than implanting the fertilized egg into her own body, it is not clear whether the IRS would rule she could deduct surrogacy expenses. Another interesting scenario would be if the taxpayer were a gay couple or male with a medical diagnosis of infertility, whether the IRS would accept the same diagnosis to cover egg donor expenses.
It is worth noting that a Private Letter Ruling only applies to the taxpayer requesting it and does not bind the IRS to that reasoning or decision with any other taxpayer. Nonetheless, the broader ruling in 2003 may provide a legal and medical pathway to getting egg donation and possibly surrogacy expenses deducted from one’s taxes.
If you have questions about whether your third-party reproduction expenses are deductible, contact your tax advisor as we are not tax lawyers. When it comes to egg donation or surrogacy law, Tsong Law Group brings years of experience in this field. Message us now to find out how we can assist you.
Read more about the deductibility of third party reproduction related expenses in our blog on egg donation expenses here. The difference in outcome may surprise you.
