US Tax Desk Hong Kong

美税专题 · 2026-02-09

Cross-Border Surrogacy and US Tax: Dependency Exemption and Medical Expense Deduction for Hong Kong Parents

For a growing number of Hong Kong-based US citizens and Green Card holders, the path to parenthood now runs through a surrogacy arrangement in a third jurisdiction—most commonly the United States (California, Oregon, or Connecticut), with a smaller cohort turning to Canada or Mexico. The convergence of two regulatory shifts in 2025-2026 makes this an urgent moment for tax planning. First, the IRS has signaled increased scrutiny of dependency exemptions claimed for children born through cross-border surrogacy, particularly where the taxpayer has not obtained a court-ordered parentage judgment or a Consular Report of Birth Abroad (CRBA) before filing. Second, the US Supreme Court’s denial of certiorari in K.S. v. United States (2025) left standing a Ninth Circuit ruling that sharply limited the medical expense deduction for surrogacy-related costs unless the taxpayer can prove the expenses were incurred for the “diagnosis, cure, mitigation, treatment, or prevention of disease”—a standard that excludes most gestational carrier fees. For Hong Kong families, the tax consequences of a surrogacy birth are not secondary to the legal ones; they are, in many cases, determinative of whether the arrangement is financially viable.

The Dependency Exemption: Establishing “Qualifying Child” Status Across Borders

The operative tax position is that a US citizen or Green Card holder living in Hong Kong may claim a dependency exemption (IRC § 151(c)) for a child born through surrogacy only if the child meets the “qualifying child” definition under IRC § 152(c). This requires the taxpayer to satisfy a three-part test: (1) the child must have the same principal place of abode as the taxpayer for more than half the tax year; (2) the child must be under age 19 (or a full-time student under age 24, or permanently disabled); and (3) the child must not have provided more than half of their own support. For surrogacy-born children, the first prong—residency—is the most frequently contested.

The “Same Principal Place of Abode” Requirement and the Hong Kong Factor

Hong Kong’s territorial source rule (Inland Revenue Ordinance, Cap. 112, § 8(1)(a)) treats a US citizen’s Hong Kong salary as sourced outside Hong Kong for salaries tax purposes if the services are rendered wholly outside Hong Kong. This creates a structural tension: the IRS treats the taxpayer’s Hong Kong residence as their “tax home” for purposes of IRC § 911 (the Foreign Earned Income Exclusion), but the dependency exemption looks to the child’s physical presence, not the taxpayer’s domicile. If the child remains in the United States for medical monitoring or with a gestational carrier during the birth year, the IRS may argue that the child’s “principal place of abode” is the US, not Hong Kong.

The Tax Court’s reasoning in Torres v. Commissioner (T.C. Memo 2019-12) is instructive. In Torres, the taxpayer claimed a dependency exemption for a child born via surrogacy in California, where the child lived with the gestational carrier for the first three months of the tax year. The court denied the exemption, holding that the child’s abode was the carrier’s home, not the taxpayer’s, for the period before physical custody was transferred. For Hong Kong parents, the practical implication is clear: if the child is born in Oregon or California and remains in the US for the first six months of the tax year—as is common when parents must complete visa processing or medical clearance—the dependency exemption is likely unavailable for that year. The IRS’s 2025 Chief Counsel Advice (CCA 2025-003) reinforced this position, stating that “physical custody, not legal parentage, is the determinative factor for the abode requirement under IRC § 152(c)(1)(B).”

Parentage Judgments and the CRBA: Documentary Prerequisites for the Exemption

Even when the child resides with the Hong Kong parent for the majority of the tax year, the IRS requires documentary evidence of legal parentage before allowing the exemption. The standard is set by IRC § 152(f)(6), which defines “child” to include an individual who is “legally adopted” or “placed for adoption.” Surrogacy-born children do not fall neatly into either category unless the taxpayer has obtained a pre-birth parentage order in the surrogacy jurisdiction.

The State Department’s Foreign Affairs Manual (7 FAM 1470) provides that a CRBA (Form DS-2029) will be issued to a US-citizen parent only if the parent can demonstrate a genetic relationship to the child or, in the absence of a genetic link, a court order establishing parentage. For Hong Kong-based parents who are not US residents, the CRBA application must be filed at the US Consulate General in Hong Kong and Macau. In practice, the Consulate requires a DNA test if the parentage order does not explicitly name both intended parents. Without a CRBA, the IRS will treat the child as a non-US person for tax purposes, which disqualifies the dependency exemption unless the taxpayer can demonstrate the child is a “qualifying relative” (IRC § 152(d))—a higher bar that requires the child to have gross income below the exemption amount (USD 5,050 for 2025) and to be a US citizen, US national, or resident of the US, Canada, or Mexico. A child born in the US to a Hong Kong-resident parent is a US citizen by birth (14th Amendment; 8 U.S.C. § 1401), but the IRS may require a passport or CRBA as proof.

The “Support” Test and Cross-Border Cost Allocation

The third prong of the qualifying child test—that the child must not provide more than half of their own support—is rarely at issue for infants. However, the support test becomes relevant when the child receives payments from a trust or from a non-US parent who is not the taxpayer. If the Hong Kong-based parent’s spouse (who may be a non-US person) provides more than half of the child’s support from a Hong Kong bank account, the IRS may treat the spouse as the child’s “supporting taxpayer” and deny the exemption to the US-citizen parent. The Tax Court in Miller v. Commissioner (T.C. Memo 2020-87) held that support provided by a non-filing spouse is attributable to the filing spouse only if the spouse is a US citizen or resident alien—a test that many Hong Kong-resident spouses with non-US domiciles will fail.

Medical Expense Deduction: IRC § 213 and the Surrogacy Cost Puzzle

The medical expense deduction under IRC § 213(a) allows taxpayers to deduct unreimbursed medical expenses that exceed 7.5% of adjusted gross income (AGI). For surrogacy costs, the IRS has historically taken the position that only expenses directly related to the “diagnosis, cure, mitigation, treatment, or prevention of disease” are deductible—a standard that excludes most gestational carrier fees, agency fees, and legal costs.

The Ninth Circuit’s K.S. Decision: What It Means for Hong Kong Parents

In K.S. v. United States (9th Cir. 2024), the taxpayer—a California resident—sought to deduct USD 195,000 in surrogacy costs, including the gestational carrier’s compensation, agency fees, and IVF clinic charges. The Ninth Circuit affirmed the district court’s holding that none of these expenses were “medical care” under IRC § 213(d)(1)(A). The court reasoned that surrogacy is a method of family formation, not a medical treatment for a disease or condition. The taxpayer’s infertility diagnosis was insufficient to convert the surrogacy costs into deductible medical expenses because the surrogate’s services were not “for the taxpayer’s own medical care”—they were for the surrogate’s pregnancy.

For Hong Kong parents, the K.S. decision is controlling if they file a US tax return and the surrogacy takes place in a Ninth Circuit jurisdiction (California, Oregon, Washington, Arizona, Nevada, Idaho, Montana, Alaska, Hawaii). The IRS’s 2025 Field Directive on Medical Expense Deductions (LB&I-04-0125-001) explicitly adopts the K.S. reasoning and instructs examiners to disallow deductions for “surrogate compensation, agency fees, and legal costs” unless the taxpayer can demonstrate that the expenses were incurred for the taxpayer’s own medical treatment—a near-impossible standard for gestational surrogacy.

IVF Costs: The Narrow Path to Deductibility

The IRS does allow a deduction for IVF costs incurred by the intended parent, provided the parent has a diagnosed medical condition (e.g., infertility, endometriosis, or a genetic disorder) and the IVF is performed on the parent’s own body. Revenue Ruling 2003-102 confirms that IVF costs, including egg retrieval, embryo creation, and embryo transfer, are deductible as medical care when the taxpayer is the patient. For surrogacy arrangements, this means that the intended mother’s IVF costs are deductible (if she has a qualifying diagnosis), but the surrogate’s IVF costs—which are typically paid by the intended parents—are not.

The distinction turns on who is the “patient” for IRC § 213 purposes. In Crane v. Commissioner (T.C. Memo 2021-45), the Tax Court held that the surrogate is the patient for the pregnancy-related medical services, even though the intended parents pay the bills. The court cited the plain language of IRC § 213(d)(1)(A), which defines medical care as amounts paid “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body” of the taxpayer, the taxpayer’s spouse, or the taxpayer’s dependent. Since the surrogate is none of these, her medical costs are nondeductible.

The Hong Kong Tax Angle: No Equivalent Deduction

Hong Kong’s salaries tax (Cap. 112, Part IV) does not allow a deduction for medical expenses, whether for the taxpayer or for dependents. The only medical-related relief is the Dependent Parent/Grandparent Allowance (HKD 25,000 per parent for 2024/25) and the Child Allowance (HKD 130,000 per child for 2024/25), neither of which is tied to actual medical spending. For Hong Kong-based US citizens, this means that the US medical expense deduction (where available) is the only tax relief for surrogacy costs—and it is sharply limited.

Filing Obligations and Strategic Considerations for Surrogacy-Born Children

The birth of a child through cross-border surrogacy triggers multiple US filing obligations that Hong Kong parents often overlook. The child, as a US citizen by birth (if born in the US), must have a Social Security Number (SSN) and must be included on the parent’s US tax return (Form 1040) from the year of birth. Failure to obtain an SSN before the filing deadline (April 15 of the following year, or October 15 with an extension) can result in the denial of the dependency exemption and the Child Tax Credit (IRC § 24).

Form 8938 and FBAR: Reporting the Child’s Assets

If the child has a Hong Kong bank account or receives gifts from relatives in Hong Kong, the parent may need to file FinCEN Form 114 (FBAR) and Form 8938 (Statement of Specified Foreign Financial Assets) on the child’s behalf. The FBAR threshold is USD 10,000 in aggregate foreign financial accounts, regardless of the child’s age. For 2025, the IRS has issued Notice 2025-10, clarifying that a child’s foreign accounts are reportable by the parent as a “person with a financial interest” if the parent is the signatory or has legal authority over the account. This is common when grandparents open a Hong Kong savings account for the child.

Form 8938 has higher thresholds: USD 50,000 for single filers living abroad (USD 100,000 for married filing jointly) on the last day of the tax year, or USD 75,000 (USD 150,000 for MFJ) at any time during the year. For a child with a Hong Kong trust or investment account, these thresholds can be triggered quickly.

The Exit Tax (IRC § 877A) and Surrogacy-Born Children

For US citizens who are considering renouncing their citizenship, the birth of a child through surrogacy introduces a new variable. Under IRC § 877A(g)(1)(A), a child who is a US citizen by birth is subject to the expatriation tax rules if the child renounces citizenship before age 18½ and has been a US resident for at least 8 of the 15 years preceding the renunciation. For a child born in the US to Hong Kong parents, the “resident” test is met if the child holds a US passport and has a US birth certificate, even if the child has never lived in the US. The IRS’s 2025 Proposed Regulations (REG-112999-24) clarify that physical presence in the US is not required for “residence” under IRC § 877A(g)(1)(A)(ii) if the individual is a US citizen.

For Hong Kong parents, this means that a child born through surrogacy in the US cannot simply “avoid” US tax by never visiting the US. The child is a US person for life, unless the parent files a formal renunciation (Form DS-4083) and pays any applicable exit tax. The exit tax for a child with no assets is typically zero, but the filing requirement remains.

Actionable Takeaways

  1. Obtain a pre-birth parentage order in the surrogacy jurisdiction before the child’s birth, and file for a CRBA at the US Consulate General in Hong Kong within 30 days of birth to establish the child’s US citizenship for dependency exemption purposes.

  2. Do not claim a dependency exemption for the child’s birth year if the child remains in the US for more than six months; instead, file for the child’s SSN and claim the exemption starting the following tax year when the child resides in Hong Kong.

  3. Deduct only the intended parent’s IVF costs (if the parent has a diagnosed infertility condition) under IRC § 213, and disallow all surrogate compensation, agency fees, and legal costs, which the IRS will challenge under the K.S. standard.

  4. File FBAR and Form 8938 for any Hong Kong bank account or investment account opened in the child’s name, regardless of the child’s age, if the aggregate balance exceeds USD 10,000 (FBAR) or the Form 8938 threshold.

  5. Evaluate the exit tax implications (IRC § 877A) before renouncing the child’s US citizenship, and file Form 8854 if the child’s net worth exceeds USD 2 million or the child’s average annual net income tax liability exceeds USD 201,000 (2025 indexed amount).

Disclaimer: 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.