If you're a family that's built or is planning to build through fertility treatments, adoption, or other family-building methods, you know how expensive it can be. In vitro fertilization (IVF) costs, on average, ~$25,000 or more for one cycle in the US. And the adoption of one child can cost anywhere from $40,000 to $70,000. Fortunately, the IRS provides some tax relief to families through deductions for medical expenses, including fertility treatment-related expenses. However, it's important to understand what's deductible and the guidelines for deducting these medical expenses. This article focuses primarily on tax-deductible IVF-related expenses and approaches for deducting medical expenses. For more information about adoption credits and adoption assistance programs, check out this resource from the IRS.
What is a Tax Deduction?
A tax deduction is a reduction in income that is subject to tax. Deductions reduce taxable income and may decrease tax liability. Tax deductions can come in many forms, such as itemized deductions, standard deductions, and personal exemptions. Taxpayers who qualify for tax deductions may save money on their tax returns.
Deductible IVF-Related Expenses
The Internal Revenue Service (IRS) allows individuals and couples to include certain IVF-related expenses in their medical expenses for tax purposes. These expenses include:
1. Fertility Enhancement: The cost of procedures performed on yourself, your spouse, or your dependent to overcome infertility issues. These procedures include in vitro fertilization (including temporary storage of eggs or sperm) and surgery to reverse prior surgery that prevented the person operated on from having children.
2. Surrogacy: Surrogacy, donations, medical fees, and compensation expenses are generally not tax-deductible. However, the following surrogacy expenses may qualify as tax-deductible:
Any medical fees directly involving you and/or your spouse
IVF-related fees of the intended parents
3. Medical expenses: IVF-related medical expenses may be tax-deductible, including insurance premiums (for individual plans), co-pays, co-insurance, and fertility drug costs. Transportation expenses, such as mileage, hotels, and parking fees related to medical treatments, can also be deducted.
The amount of medical expenses that can be deducted is limited. Taxpayers can deduct only medical and dental expenses that exceed 7.5% of their adjusted gross income (AGI) on their tax return. The AGI is the total income minus adjustments, such as moving expenses, employer savings plans (e.g., 401(k)s), individual retirement accounts (IRAs), court-ordered alimony payments, losses from the sale or exchange of property, and school loan interest.
Example: If your AGI for 2021 was $70,000 and you spent $15,000 out of pocket for treatment, you can deduct medical expenses above $5,250 ($70,000 x 7.5%). Therefore, you can deduct $9,750 ($15,000 - $5,250).
Standard vs. Itemized Deductions
Taxpayers who itemize their deductions may be able to deduct more of their medical expenses than those who claim the standard deduction. To itemize deductions, they must be more than the standard deduction, which is the amount that the IRS allows taxpayers to subtract from their income to reduce their tax liability.
In 2022, the standard deduction amounts were as follows:
Single or Married Filing Separately: $12,950
Head of Household: $19,400
Married Filing Jointly: $25,900
Taxpayers should itemize their deductions if their total itemized deductions, including medical expenses, are greater than the standard deduction amount. Keeping receipts and documents for all deductible expenses or tax forms is essential.
Common itemized deductions include:
Mortgage interest and PMI premiums
State and local property taxes
Medical and dental expenses
Let's say you're filing as a single filer and have a standard deduction of $12,950, but your total deductions, including mortgage interest, charitable donations, and medical expenses, are $15,000. In that case, you should itemize your deductions to take full advantage of your deductions and minimize your taxable income.
To claim a deduction for your fertility treatment-related expenses, you must gather all your medical expense-related documents, including receipts from providers, pharmacies, labs, hospitals, and adoption agencies. You should also review your Explanation of Benefits (EOB) and other statements from your insurance carrier.
Keep track of your expenses, including transportation costs, as these can add up quickly, particularly if you travel out of town. Local transportation and travel expenses may also be deductible, so keep receipts from rideshare, taxi, bus, train, or airplane trips and parking and tolls.
To stay organized, develop a filing system that works for you. You can use an app like Smart Receipts, Foreceipt, or MileIQ to track expenses or create an Excel spreadsheet. Be sure to file and store receipts periodically so you don't have to scramble to find everything come tax time.
Deducting your family-building expenses from your taxes can provide much-needed relief to families struggling with the high costs of fertility treatments, adoption, and other family-building methods.
If you need help or have questions, please consider contacting a tax professional. If you have questions relating to your family-building journey, reach out!
*This discussion is for informational purposes only. Please consult your tax professional for specific information and guidance regarding your situation.