IRS Denies Medical Expense Deduction for IVF Costs

In a new private ruling (PLR 202114001, 1/12/21) the IRS substantially limited write-offs for IVF costs claimed by a same-sex couple that used an unrelated surrogate.

Under the new Consolidated Appropriations Act (CAA), a taxpayer can deduct qualified medical expenses in excess of 7.5 percent of adjusted gross income (AGI). This threshold had been temporarily lowered from 10 percent of AGI, but was scheduled to revert to 10 percent in 2021 before the CAA made the lower threshold permanent.

Generally, qualified medical expenses include payments for the diagnosis, cure, mitigation, treatment, or prevention of disease, or payments for treatments affecting any structure or function of the taxpayer’s body or the body of the taxpayer’s spouse or dependent.

Facts of the new ruling: The taxpayers—let’s call them Alan and Barry—are a male same sex couple legally married in the state where they reside. They wish to have a child who has as much representative DNA from the couple as possible.

As a result, Alan will donate sperm and Barry’s sister will donate the egg. An unrelated third party will be used as a gestational surrogate to carry the child to term. In their ruling request, the couple s clarification for deducting the following costs and fees as medical expenses:

• Medical expenses directly attributable to both spouses
• Egg retrieval
• Medical expenses of sperm donation
• Sperm freezing
• IVF medical costs
• Childbirth expenses for the surrogate
• Surrogate medical insurance related to the pregnancy
• Legal and agency fees for the surrogacy
• Any other medical expenses arising from the surrogacy

Tax outcome: Only costs and fees directly attributable to medical care for diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body of the taxpayer, the taxpayer’s spouse or the taxpayer’s dependent qualify as medical expenses. But expenses involving egg donation, IVF procedures, and gestational surrogacy incurred for third parties are not incurred for treatment of disease, nor do they affect any structure or function of either of the couple’s bodies. 

Therefore, the IRS says the following products and services are not deductible as medical expenses:

• egg retrieval
• IVF medical costs
• childbirth costs and fees for the surrogate
• surrogate medical insurance related to the pregnancy
• legal and agency fees for the surrogate
• other medical costs and fees arising from the surrogacy

In contrast, however, a small number of medical costs or fees paid for medical care directly attributable to the taxpayers, such as those for sperm donation and sperm freezing, are deductible subject to the 7.5 percent-of-AGI threshold. As for this case, the couple has agreed to abide by the IRS’ decision.