Protective Refund Claim – Affordable Care Act

Earlier this year, the Supreme Court agreed to hear a case regarding the Patient Protection and Affordable Care Act (ACA). In Texas v US, the Court of Appeals held that the requirement for individuals to carry health insurance was unconstitutional. As part of this case, the constitutionality of other provisions of the ACA may be addressed, including several tax provisions. Two specific taxes enacted as part of the ACA were the (1) additional Medicare tax of 0.9% on earned income in excess of $200,000 (or $250,000 for joint filers) and (2) the net investment income tax of 3.8% on net investment income for taxpayers with adjusted gross income in excess of $200,000 (or $250,000 for joint filers).

These taxes appear on Forms 8959 (Medicare tax) and 8960 (net investment income tax) as part of your tax return.

Should the Supreme Court rule that these taxes are retroactively unconstitutional, taxpayers will be able to file amended returns seeking refunds of the taxes paid provided that they do so prior to the expiration of the statute of limitations associated with the impacted tax years (generally, three years after the original due date of the return or, if the return was extended, three years after the return was filed). The IRS permits taxpayers to file protective refund claims when the right to a refund is contingent on future events that may not be determinable until after the statute of limitations has expired. The decision in the pending case would be such a contingency.

The statute of limitations for a protective claim for the 2016 tax year will expire on July 15, 2020 for those taxpayers that filed their returns by April 15, 2017 (or extended their returns and filed their actual return prior to July 15, 2017). For those filing after July 15th, the deadline would generally be three years following the actual filing date.

It is unclear how the Supreme Court will rule although many commentators and experts believe that it would be highly unlikely that they would declare these taxes unconstitutional prior to the 2019 tax year (this was the year that the penalty imposed on individuals failing to carry insurance was eliminated).

Taxpayers who nevertheless want to preserve the right to a refund and incur the cost of doing so should consider filing a protective refund claim for the 2016 tax year and, depending on when the Supreme Court rules, the 2017 tax year. Please contact us if you would like to discuss the advisability of filing a protective claim.