Deductibility of Assistive Reproductive Technology Costs under the Tax Cuts and Jobs Act
Recent Court Cases Create Opportunities for Modern Families.
One of the most significant changes to the tax code under the Tax Cuts and Jobs Act (TCJA) of 2017 regards the deductibility of expenses for taxpayers who itemize deductions on their Form 1040. For many modern families, changes to the deductibility of medical expenses, including Assistive Reproductive Technology (ART), may be particularly problematic.
Generally, to the extent that medical expenses including ART exceed a certain percentage of Adjusted Gross Income (AGI), they can be deducted in the same year that expenses not reimbursed by healthcare insurance are paid. (For purposes of this discussion, AGI is basically all of an individual’s income prior to deductions or other decreases). In 2017 and 2018, in order to be deductible, otherwise qualifying medical expenses must exceed 7.5% of AGI. Going forward for 2019 through 2025, qualifying medical expenses are only deductible to the extent they exceed 10% of AGI.
ART includes standard medical practices such as hormone therapy and sperm donation, more advanced procedures like IVF, as well as options where state law is still developing, such as the use of egg donation and surrogates.
Under the TCJA, all forms of ART are generally deductible, except the cost of surrogacy. Surrogacy is excluded because the expenses incurred in utilizing a surrogate are not expenses for medical procedures performed on the bodies of the taxpayer or the taxpayer’s spouse. Surrogacy requires the participation of a third party.
Herein lies the problematic issue for modern families. Opposite-sex couples, same-sex female couples, and single women can avail themselves of most types of ART and then deduct a significant portion of the expenses. However, for same-sex male couples and single men, the use of ART to produce a child requires, at a minimum, the use of both a surrogate and an egg donor. In addition to surrogacy and egg donation being two of the more expensive ART methodologies, when utilized by male couples or single men, none of these expenses are deductible. This is because neither egg donation nor surrogacy are procedures that affect the man’s body. The practical outcome is that some types of families are not able to utilize the tax law to defray the cost of conceiving, while other types of families are.
In September 2017, three months before the TCJA was passed, the 11th Circuit Court of Appeals decided Morrissey v. U.S,. which addressed the issue of deductibility of ART expenses incurred by a single man using IVF, egg donation, and surrogacy to conceive a child. The Court held that the expenses were not deductible as medical expenses because they were not incurred to perform medical procedures on the taxpayer, his spouse, or his dependents. In addition, the Court also found that the IRS application of the medical expense deduction rules, which produced an inequitable result when viewed broadly, did not violate the equal protection clause of the Fifth Amendment when viewed narrowly under Constitutional analysis.
For more than a half-century, Congress, the IRS, legal scholars, and the public have gone back and forth over the issue of medical expense deductions, especially expenses paid for ART medical services. Morrissey shows us that many modern family issues are still unresolved in the tax code, as elsewhere.
Beginning in 2019, the fundamental change to the tax code under TCJA will result in far fewer individuals itemizing their deductions. For those who do itemize, less of their annual medical costs will be deductible. In addition, the issues surrounding ART will continue to be debated, change will continue to be the norm, and these changes will continue to create special problems for modern families.
In addition to causing the types of problems present in Morrissey and innumerable other cases, change also creates planning opportunities. As Morrissey shows, the tax code can sometimes work differently for modern families, and with the changes to the underlying tax law, this effect will likely be exacerbated. Marcum’s Modern Family & LGBT Services group remains on the cutting edge of issues facing modern families. Taxpayers will benefit by being ready for the changes that will affect them in 2019 and beyond. Speaking to your Marcum tax advisor to plan for the coming changes is a great first step.