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Monday, 08 October 2018 12:07

What Are The Tax Implications For US Surrogates?

Check out this rarely addressed topic in this article by Lawrence R. Pappas, CPA, P.C.

The Internet contains a wide variety of opinions related to the taxability of the surrogacy fee to the surrogate mother. Some authors classify this fee as a gift; however, a U.S. Supreme Court decision (Commissioner vs. LoBue, Philip (1956, S Ct)) stated that, for tax purposes, gifts must be made out of detached or disinterested generosity. Any payment that parents make to a surrogate mother cannot reasonably be considered detached or disinterested, so surrogate fees are not gifts. 

On the other hand, many surrogacy agencies advise their clients that surrogacy payments are for pain and suffering and thus are exempt under Sec 104 of the Internal Revenue Code (IRC). This section is about “compensation for injury or sickness”; however, the term “pain and suffering” does not appear anywhere in that section. Surrogacy does not meet the definition of an excludable physical injury under IRC Sec 104 such as an injury associated with a car accident, bungled surgery or other accident. Thus surrogacy fees do not fall under the compensation exclusion for injury or sickness. 

IRC Sec 61 states, “Except as otherwise provided, gross income means all income from whatever source derived.” There is no exception in the code for surrogacy fees, so such fees are considered taxable income for the surrogate mother. To complicate matters, the surrogate mother is providing a personal service and thus may be subject to the self-employment (Social Security and Medicare) taxes in addition to income tax if such a fee is received in the course of business. 

To be subject to Social Security taxes, the surrogacy arrangement would have to rise to the level of a trade or business. The determination of whether that is the case is dependent on the facts and circumstances of the individual surrogacy. For instance, if a surrogate has entered into such an arrangement previously or intends to do so again, the fee will likely be considered self-employment income. However, if the surrogacy is a one-time activity, an argument could be made that this act is not a business—in which case the surrogacy fee would not be subject to Social Security taxes. 

If the fee is considered self-employment income, it may be offset with benefits that are available to any self-employed taxpayer, including the ability to deduct health insurance above the line rather than as an itemized deduction and the ability to make deductible contributions to a self-employed retirement plan or IRA. Although there are not many deductible business expenses in such a situation, the legal or other costs associated with drafting and executing the surrogacy contract are deductible. 

A self-employment surrogacy activity would fall into the category of a specified service business for the purposes of the new, self-employed and pass-through business deduction that will be available in 2018 through 2025. Thus, provided that the surrogate mother’s return has taxable income that does not exceed $157,500 (or $315,000 if she is married and files a joint return with her spouse), she would be eligible for the new IRC Sec 199A pass-through deduction, which is equal to 20% of the net self-employment income. However, this deduction phases out at taxable incomes between $157,500 and $207,500 (or $315,000 and $415,000 if filing jointly). The income from self-employment surrogacy can be used to determine the earned income tax credit if a surrogate mother is otherwise qualified. 

Unfortunately, tax novices on the Internet are creating their own interpretations of the tax code, and many of them are attempting to justify their preferences instead of instead of describing the actual rules. 

As a result, many - dare we say, most - surrogate mothers are not reporting their surrogacy income. The IRS is not catching up with them because neither the parents nor the agencies are issuing 1099-MISC forms to surrogate mothers. The parents are under no obligation to issue a 1099-MISC because, for them, the payment is not related to a business. The agency, on the other hand, is a business, so if the surrogacy fee passes through it, the agency is obligated to issue a 1099-MISC. 

Learn More About International Surrogacy In Ukraine:
Delivering Dreams helps couples throughout the US struggling with infertility have children. Located in NJ and Kyiv, Ukraine, our amazing medical facilities and professionals, surrogates and donors are in Ukraine, because Ukrainian law protects the rights of parents and their children from inception at affordable costs and high success rates.

Unique to Delivering Dreams, we offer guaranteed not to exceed, all-inclusive pricing and contracts under US law to provide prospective parents legal and financial security.

1 in 6 couples are struggling with infertility. You are not alone. We want to be your path to parenthood.

Would you like to learn more? Please contact us to share your challenges, ask questions and discuss solutions. This email address is being protected from spambots. You need JavaScript enabled to view it. and www.international-surrogacy.com, 1.908.386.3864

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I am very satisfied with the medical services. Coordinator Lyubov was always in touch, answered any questions quickly and clearly, and helped in any difficult situations. The level of personal support and genuine concern for my health and well-being was 100 percent. I am very pleased that I am going through the surrogacy program with this agency. I feel protected and confident. I really like the attitude of the agency, timely payments, and the curator and manager make sure that pregnant girl...
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I am very pleased to meet such beautiful and kind people Hello everyone, I'm Myroslava and I'm going through my SM program at the Delivering Dreams agency. I want to express a big thank you to the girls who cooperate with me, who worry about my condition, who are always in touch, and who always support me - Omelchuk Lyubov and Anna Levchenko. I've already been to a program and therefore I have something to compare it with, this agency and the staff are at the highest level. And also the doct...
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Myroslava
Hallo Oksana,  vielen Dank für Deine ausführliche Erklärung. Wir haben alles gut verstanden. Das zeichnet due Arbeit von Euch und Eurem Ärzteteam aus. So kann man gut vertrauen. Hello Oksana, Thank you very much for your detailed explanation. We understood everything well. This is what distinguishes the work of you and your medical team. This is a good way to trust.
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One of the best teams and my program! Hello! I want to share my experience and my impression of my program, one of the best programs, and the team from the Delivering Dreams Agency! Great attitude, attentive staff, responsible! Always in touch 24/7! Lyubov Omelchuk is a wonderful person, she was with me from the first minute of implantation until the end of the entire program! I am grateful that Lyubov was always with me! People of their word! Staff who never let you down! I highly recommend...
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Anna Priazhnikova
DD is outstanding We have just returned home to California with our beautiful daughter who was born in Lviv. The Delivering Dreams team made our trip so easy and straightforward. From our arrival to Ukraine to our departure, they had everything covered. The constant communication from the team is amazing. All of our paperwork for the embassy was properly prepared and organized. I cannot recommend them enough, we are even thinking about having another baby with DD!
Andrey Frenkel
Thank you very much Dear Oksana, Thank you very much for the great news. We still can't believe it and are totally speechless. The work you do under these difficult conditions cannot be put into words. Thank you very much for that. Liebe Oksana, vielen Dank für die super schöne Neuigkeit. Wir können es noch gar nicht glauben und sind total sprachlos. Was Ihr für eine Arbeit leistet, unter den schweren Bedingungen,  kann man nicht in Worte fassen. Vielen herzlichen Dank dafür.
Couple from Germany
Very friendly, pleasant team I am very grateful to the international surrogacy agency Delivering Dreams for such a short period of experience that dispelled all doubts and the remains of incomprehensible questions that were before and during this program, but I had a wonderful curator Lyuba who did not leave me for a second even on distances?❤️ This is how experienced, pleasant, kind woman you want to go to the program at least immediately after finishing the first one! Very friendly, pleasa...
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Thank you for the wonderful experience and the opportunity to help future parents. I also want to thank Lyubov Omelchuk (Delivering Dreams) for her kindness and empathy, she was always in touch throughout the program, especially since the rehabilitation course is based on the supervision and advice of the curator. My worries about the procedure were in vain because everything went perfectly, thanks to the 24/7 support of the curator and qualified doctors Дякую за чудовий досвід, та змогу...
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Angelina
I recommend this agency. I was a surrogate mother in this agency, I really liked everything. The doctors treated me well and explained everything clearly. Curator Lyuba and Anya are always in touch and answer all questions, always supporting. I recommend this agency. Я була сур мама в цьому агентство, мені все дуже сподобалося лікарі гарно відносяться, розповідають все доступно. Куратор Люба і Аня завжди на зв'язку і відповідать на всі запитання, завжди підтримують. Рекомендую це агентство.
Yuliia
Thank you very much for worrying about me.  I really want to start the program at Delivery Dreams agency. The doctors here are extraordinary. Coordinator Lyubov is also extraordinary, always in touch and worries about me. After the hysteroscopy, Lyubochka is on the phone with me 24/7. Thank you very much for worrying about me. I hope that my program will start soon and I will present the baby to the biological parents. Thank you for being there!?? Я дуже хочу почати програму в агенстві De...
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Nastya

Under Ukrainian law, surrogacy is a legal affordable option for traditionally married couples to have children using their own embryos, or with either an egg or sperm donor. There must be a medical reason you can’t carry a child. You are also able to participate if you have had 4 unsuccessful IVF attempts.

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Under Ukrainian law, surrogacy is a legal affordable option for traditionally married couples to have children using their own embryos, or with either an egg or sperm donor. There must be a medical reason you can’t carry a child. You are also able to participate if you have had 4 unsuccessful IVF attempts.