Surrogacy is not just a journey of the body and mind; it also involves significant financial considerations, especially when it comes to taxes. Understanding surrogacy tax deductions is essential for reducing tax obligations and maximizing net income from your meaningful journey.
This blog post aims to demystify the complexities surrounding taxation in surrogacy, offering guidance to ensure financial matters are handled with clarity and confidence. We’ll walk you through how to report your income, keep track of your expenses and even how to work seamlessly with tax professionals. Plus, we’ll show you how to take full advantage of any surrogacy tax deductions you’re entitled to. empower you to take charge of your finances, so you can approach tax season with confidence and peace of mind.
In this article, we’ll address the following:
- What Counts as Surrogate Income?
- Taxable vs. Non-Taxable Surrogate Income
- How to Report Income from Surrogacy
- What Surrogacy Expenses Apply for Tax Deductions and Credits?
- How to Get the Most Tax Deductions for Your Surrogacy Expenses
- Key Takeaways
What Counts as Surrogate Income?
If you’re considering becoming a surrogate, it’s crucial to get a clear understanding of the different forms of income and reimbursements you’ll receive and how each affects your taxes. Navigating these financial aspects confidently will help you manage your surrogacy journey with greater ease and assurance.
- Base Compensation: This is the primary payment surrogates receive. Base surrogacy compensation varies based on several factors, including your location, experience and the specific arrangements of your surrogacy agreement.
- Reimbursements: Surrogates often incur out-of-pocket expenses related to their pregnancy, which the intended parents or the surrogacy agency usually reimburse. These expenses include medical appointments, travel costs for medical visits, maternity clothing and other pregnancy-related costs.
- Additional Expenses: Beyond the base compensation and standard reimbursements, surrogates might receive other payments for various circumstances, such as carrying multiples or undergoing specific medical procedures. These payments can also have different tax implications. For instance, a payment for undergoing an invasive procedure might be treated differently from a reimbursement for travel expenses.
Documenting and reporting your income as a surrogate is more than just a formality — it’s essential. It’s important to keep a detailed record of every payment and reimbursement you receive, right down to saving those invoices and expense receipts.
This isn’t just about being organized; it’s about being transparent and maintaining trust in your surrogacy arrangement. Accurate documentation also helps you navigate tax season with confidence, ensuring you’re on solid ground every step of the way.
Taxable vs. Non-Taxable Surrogate Income
Navigating the financial aspects of your surrogacy journey involves understanding the tax implications of different income types. Let’s explore what constitutes taxable and potentially non-taxable surrogate income.
Taxable Income (Base Compensation): Surrogates receive base compensation for their role in the pregnancy, which is typically considered taxable income. This amount varies depending on your location, experience and the terms of your surrogacy contract, and it must be reported on tax returns in accordance with IRS guidelines.
Potentially Non-Taxable Income (Medical Reimbursements): Reimbursements for certain surrogacy-related medical expenses, such as in vitro fertilization (IVF) and other assisted reproductive technologies (ART), may be non-taxable. However, the tax status of these reimbursements can be complex, as IRS and court rulings often do not categorize them as deductible medical expenses.
How To Report Income From Surrogacy
Form 1099-MISC:
Surrogates usually report their income through Form 1099-MISC, typically provided by the intended parents, the surrogacy agency or the escrow service. This form is key for maintaining accurate income records for both yourself and the IRS. However, it’s important to understand that not all surrogacy agreements result in the issuance of a 1099-MISC. The lack of this form does not mean the income is tax-exempt.
Even without a 1099-MISC, surrogates are responsible for accurately reporting their income. It’s crucial that you diligently track all compensation received and consult with tax professionals to ensure they adhere to tax laws. Proper handling and reporting of your surrogate income, especially when a 1099-MISC is received, are vital to avoid legal complications and ensure tax compliance. We encourage you to consult a tax professional for accurate reporting and guidance on your tax obligations.
Self-Employment Tax:
Surrogates are classified as self-employed individuals in the context of their compensation. This status requires you to pay both the employer and employee portions of Social Security and Medicare taxes, unlike traditional employees who share these costs with their employers. This higher tax burden can significantly affect your net compensation from surrogacy.
It’s essential for you to budget for this additional tax burden when considering your overall surrogate compensation. Proper financial planning and seeking advice from a tax professional experienced in self-employment and surrogacy-related tax matters are advisable to ensure you are fully prepared for these tax obligations.
What Surrogacy Expenses Apply for Tax Deductions and Credits?
Medical Expenses
Navigating the tax deductions for surrogacy-related medical expenses can provide you with significant financial relief. Here’s a breakdown of potential deductible expenses:
- Medical Appointments: Regular check-ups, specialized consultations and any necessary medical procedures during the pregnancy.
- Maternity Clothing: Essential clothing items required due to physical changes during pregnancy.
- Prenatal Vitamins: Supplements prescribed or recommended for the health of the pregnancy.
- Prescribed Medications: Any medications specifically required for your health and well-being during the pregnancy.
As a surrogate, you should meticulously document these expenses and consult with tax professionals to confirm their eligibility for tax deductions.
Travel Expenses
Surrogates can potentially claim tax deductions for travel expenses incurred as part of their surrogacy journey. This can provide you with financial benefits, but it’s important to understand the criteria and maintain appropriate documentation. Here’s an overview of such deductible expenses:
- Travel to Medical Appointments: Costs incurred for transportation, including fuel and public transit, to and from regular check-ups or specialized medical consultations related to your surrogacy experience.
- Accommodation: Expenses for overnight stays, when necessary, due to distant medical visits or procedures directly related to your surrogacy journey.
- Meals During Travel: Reasonable costs for meals during travel, within set limits, for your surrogacy-related medical appointments or procedures.
Ensure you keep detailed records of all travel expenses, including receipts and mileage logs, to substantiate these deductions.
Professional Fees
Legal related to surrogacy can be intricate when it comes to tax deductions for surrogates. Generally, the IRS does not allow surrogates to deduct expenses related to egg donation or surrogacy. However, surrogates might have some leeway with certain expenses that are essential to the surrogacy process and are directly related to their duties, such as legal and agency fees incurred.
However, obtaining a Private Letter Ruling (PLR) from the IRS is advisable for more precise guidance on these deductions. A PLR is essentially a document in which the IRS provides an official decision on how the tax laws apply to your specific circumstances. This can be particularly beneficial for surrogates and intended parents because surrogacy-related costs aren’t typically categorized as medical expenses under current IRS guidelines, which makes their tax treatment less clear.
Surrogates and intended parents should keep all invoices and receipts for legal services to support their tax deduction claims.
Consulting Tax Professionals
Navigating the tax implications around surrogacy can be extremely complex. The unique circumstances and expenses do not fit standard IRS categories and rules. Consult a tax professional that specializes in surrogacy-related tax issues for guidance on:
- Accurately reporting income and documenting expenses.
- Classifying reimbursements and payments.
- Identifying eligible deductions.
- Reviewing deductibility of legal, agency and escrow fees.
- Explaining processes for obtaining IRS rulings.
- Ensuring proper form completion to avoid audits.
- Helping financially plan for overall tax obligations.
Finding professionals experienced in surrogacy taxes is key for understanding obligations, maximizing deductions and avoiding legal issues. Their guidance can save you significant money and frustration at tax time.
How To Get the Most Tax Deductions for Your Surrogacy Expenses
You should be proactive in planning for tax season to maximize deductions on your surrogacy-related expenses:
- Set aside 20-30% of your surrogacy compensation to cover potential income taxes. The compensation for carrying a pregnancy is considered taxable income, so taxes must be paid.
- Track all surrogacy-related expenses in a spreadsheet or app throughout the journey. This should include agency fees, legal fees, medical costs, travel expenses, lost wages due to appointments, etc.
- Collect and save all receipts, invoices and bank/credit card statements related to surrogacy expenses. Scan or take photos of these documents so they are easily accessible for tax prep.
- Consult a tax professional with surrogacy experience to identify all eligible medical expense deductions. They can also advise if expenses can be deducted in the current tax year or must wait until the child is born.
- Work closely with the tax preparer to submit your taxes with all applicable deductions properly itemized. Doing this from the start can help avoid triggering an audit.
7 Key Takeaways
Effectively navigating the intricate finances involved with surrogacy arrangements requires grasping these seven key elements:
- Surrogates receive various types of compensation and reimbursements, which need to be properly documented and reported for taxes. Key income types are base compensation, expense reimbursements and additional payments for special circumstances.
- Base compensation is considered taxable income that must be reported. Reimbursements for certain medical expenses may be non-taxable, but the rules are complex.
- Income is typically reported on a Form 1099-MISC. However, you’ll still need to track and report all income even if you don’t receive this form.
- Surrogates pay higher self-employment taxes on their income. Proper planning for this tax burden is essential.
- Potential deductible expenses include medical costs, maternity clothing, prenatal vitamins, prescribed medications and travel costs for medical appointments. Strict documentation requirements apply.
- Consulting a tax professional experienced with surrogacy can guide you on claiming deductions, especially for legal and agency fees. Obtaining a Private Letter Ruling from the IRS may be advisable.
- Surrogates should proactively set aside income for taxes, keep detailed expense records, save all receipts and statements and work closely with their tax preparer.
Navigating Finances With Joy of Life’s Guidance
Surrogacy involves many intricate financial considerations, from tracking your income to maximizing deductions. While complex, understanding the key aspects equips you with the ability to handle your finances wisely.
The compassionate team at Joy of Life® has extensive experience supporting surrogates. As your trusted partner, we empower you to understand all facets of surrogacy, including financial matters, through education and advice.
Our team can support you at each step of this meaningful journey by answering questions, connecting you with experts and ensuring your best interests are protected. If you feel ready to explore this profound calling, apply today to become a surrogate mother and change lives.
