June 12, 2017

Assistive Reproductive Technologies: Are They Deductible?

By Monte Colbert, Director, Tax & Business and John Bowlby, Staff, Tax & Business

Assistive Reproductive Technologies: Are They Deductible? Tax & Business

Infertility today is estimated to affect approximately 10 percent of Americans who are of reproductive age. Through discoveries of modern science, the utilization of assistive reproductive technology (“ART”) is tearing down the barriers of infertility. Acronyms like IVF, ICSI, ZIFT, and GIFT, and the use of donors and surrogates, represent just some of the more common methods in an effort to overcome the difficult experiences of not being able to conceive. However, these new methods come with a heavy price tag. Health insurance offers little or no relief to the burden of the costs that often run into tens or even hundreds of thousands of dollars.

It is estimated that only one in four employer health plans covers some type of fertility services, but most often ART is excluded from these policies. Is tax relief available to those who incur these expenses, in the form of a medical expense deduction? The answer to this question may not be clear. We need to start by asking the seemingly obvious question: does pregnancy involve any of the structures or functions of the human body? The answer to this question may determine what is and what is not an allowable medical expense deduction.

The Internal Revenue Code allows for deductions for medical care if the following requirements are satisfied:

  1. The person who pays the medical expenses is the person entitled to the deduction;
  2. The person who receives the medical care must be the person who pays or the spouse or dependent of the person who pays;
  3. Expenses must be paid in the same year in which they are deducted;
  4. The amount paid must exceed 10% of adjusted gross income (AGI); and
  5. The expense must not have been compensated by insurance.

This seems like a simple, straightforward test. However, this is where the question of whether pregnancy affects the structures or functions of the human body becomes relevant.  The Internal Revenue Code states that amounts paid for “medical care” only include the following:

  1. The diagnosis, cure, mitigation, treatment, or prevention of disease;
  2. The purpose of affecting any structure or function of the body;
  3. Transportation primarily for, and essential to, medical care;
  4. Long-term care services; and
  5. Medical insurance.

At first glance, the only way that ART expenses will be covered is if we agree that pregnancy affects the structure or function of the body.  However, the term “disease” has been interpreted broadly by the IRS and has been expanded to mean “disorder” and “condition.”  The IRS has also agreed that infertility is a “condition.”  Generally, ART expenses are deductible because they are for the treatment of infertility and because ART’s purpose is to affect the structure or function of the body, primarily for the alleviation of a physical defect or illness. However, these notions are occasionally challenged by the IRS. 

Adding to the risk of losing the deduction for ART treatments is the fact that the medical care expense deduction rules are not well settled law, primarily because the definition of medical care is not a very good one.  For example, under the definition, taxpayers should be able to deduct getting their ears pierced, because that procedure affects the function and structure of the body.  The exemplar of the rule’s breadth is the case of elective cosmetic surgery.  According to the plain meaning of the Code’s definition, cosmetic surgery expenses should be deducted just as easily as the costs for a broken arm.  In fact, in 1976, the IRS did conclude that elective cosmetic surgery costs were deductible as a medical expense because the surgery alters the structure of the body.   

Fifteen years later though, Congress changed the law to specifically exclude elective cosmetic surgery from the definition of medical care. Under a common sense analysis, this will not bother most people, especially since the costs of cosmetic surgery that is medically necessary due to disease or accident are still deductible.  The takeaway from Congress’ action in this case, however, is that Congress is willing to change the law to exclude procedures it believes should not be included in the medical care definition.  Although ART is very different from elective cosmetic surgery, the reasons for and against allowing deductions for ART are still argued passionately. Currently, many of the expenses incurred by couples trying to conceive are deductible, such as the cost of in-vitro fertilization, but some may not be. The cost of using a surrogate, for example, is not currently deductible.

Another legal difficulty with ART, in addition to the poor definition upon which its deductibility rests, is that ART is largely technology-based and therefore requires specialized knowledge to understand. ART procedures bring with them a requirement of a new technical understanding for regulators, in trying to decide what expenses should be deductible. In addition to the ambiguity with which we entered 2017 in regards to ART’s deductibility, we add a political, and the attendant philosophical, change to the reproductive technology arena.  Reproductive technology is largely driven by new technology and changes in social norms, and as a subject, tends to be grouped with broader, more politically charged topics. This is an area in which we may expect to see more change. While they may not be big changes, even a small change in policy could cause taxpayers to lose many thousands of dollars in potential tax deductions. 

Prospective parents commit a huge amount of emotional capital, money, and time in maintaining good health and researching the most appropriate forms of ART. This should also include the time to understand the tax deductibility of the prospective procedures. Prospective parents would be well advised to speak with their tax advisers to understand the current status of these types of deductions.

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