The journey to parenthood can take many forms, and for some, surrogacy offers a viable path. But as with many aspects of life, there’s a tax dimension to consider. If you’re thinking about using a surrogate or are planning to become one, understanding the tax implications is vital.
- Surrogate Payments Are Taxable Income
Surrogacy payments, whether paid for carrying the baby or for relinquishing parental rights, are taxable income to the surrogate mother in the United States. They are not seen as gifts but as compensation for services rendered. This means the surrogate mother should expect to report this income on her annual tax return.
- Issuing Forms
Intended parents, or the agency involved, typically do not need to issue a Form 1099 to the surrogate. This is because surrogacy payments aren’t considered payments for self-employment activities. However, surrogates should still keep accurate records of all payments received.
- Deductible Medical Expenses
Any medical expenses the surrogate incurs related to the surrogacy, which aren’t reimbursed, may be deductible. As with all medical expenses, they must exceed 7.5% of the surrogate’s adjusted gross income to be deductible. Additionally, these expenses would be reported on Schedule A, meaning the surrogate would need to itemize deductions to benefit from them.
- Legal Fees
Legal fees associated with surrogacy agreements may also be deductible under specific circumstances. It’s essential to consult with a tax professional to ensure these deductions are taken correctly.
- Surrogacy Abroad
If you’re an American considering international surrogacy, remember that the U.S. taxes its citizens on worldwide income. The surrogate would still need to report the income on her U.S. tax return, even if the payments are made overseas and she resides outside the U.S. during the surrogacy.
- Agreements and Clarity
It’s essential for both parties—intended parents and surrogate—to have a clear understanding of the financial aspect of the surrogacy agreement. Clear documentation can prevent future misunderstandings and ensure that both parties fulfill their tax obligations.
Surrogacy can be a beautiful way to bring a new life into the world, but it’s essential to be aware of the tax implications. The tax treatment of surrogate payments has been a topic of debate and can be somewhat ambiguous. While compensation to a surrogate is generally considered taxable income and not a gift, there have been some arguments and cases in favor of considering certain payments as gifts. However, this is an area where the IRS has not provided definitive guidance.
Gift Exclusion in Surrogacy Payments:
-General Rule: As stated earlier, the IRS typically views surrogate payments as taxable income for services rendered by the surrogate mother. It means the surrogate should report it as income on her tax return.
-Gifts and the Annual Exclusion: In 2023, the annual gift tax exclusion is $15,000 per recipient. It allows a person to give up to that amount to any individual, tax-free, without eating into the lifetime gift/estate tax exemption. If a payment were to be considered a gift, and it exceeds this amount, the donor (intended parents) would need to file a gift tax return (Form 709), but they wouldn’t necessarily owe gift tax due to the high lifetime exemption amount.
-Arguments for Gifts: Some have argued that certain payments or reimbursements, especially those that are not directly for medical services or pain and suffering, could be classified as gifts. For instance, if the intended parents pay for non-medical things, like maternity clothes, could that be considered a gift?
-IRS Position: The IRS has not issued explicit guidance on this matter, which leads to uncertainty. However, considering surrogate payments as gifts can be risky. It’s likely that the IRS would see it as an attempt to avoid tax obligations.
-Legal Agreements: It’s crucial for surrogate agreements to be explicit about payments, categorizing them as either compensation or reimbursement of expenses. Being clear can help mitigate potential tax issues.
In Conclusion:
While there’s a theoretical argument to be made for certain surrogate-related payments to be gifts, it’s a gray area. Classifying such payments as gifts could invite scrutiny from the IRS. Both surrogates and intended parents should consult with a tax professional who has experience with surrogacy arrangements to ensure they’re making informed decisions.
If you have any questions or need help with filing your taxes, reach out to Taxfully
