Depending on a future Supreme Court decision, taxpayers who have paid certain taxes associated with the Affordable Care Act (ACA) on recent tax returns may find themselves eligible for a refund. For some 2016 tax filers—specifically, those who extended their 2016 tax returns—it may be wise to file a protective claim as soon as possible. It would be advisable to file a claim for multiple years (2016, 2017, & 2018) if the court decision gets postponed and a decision is not rendered until a future year.
Earlier this year, the U.S. Supreme Court announced that it will hear an appeal of California v. Texas (formerly docketed as Texas vs. U.S.). The high court’s decision on the case will examine the constitutionality of the individual mandate and potentially decide the fate of the Affordable Care Act (ACA). Experts predict that the final decision will be announced in either late 2020 or the first half of 2021.
In the event the ACA is invalidated, a few provisions may also be impacted, including the Net Investment Income Tax (NIIT) and the Additional Medicare Tax. Should these provisions be eliminated, it is possible that there will be a refund opportunity for taxpayers who paid one or both. However, a claim for refund must be filed in a timely manner. Due to the statute of limitations on tax filings, taxpayers who paid the taxes in 2016 need to have filed a 2016 protective claim by July 15, 2020. However, 2016 tax filers who extended their 2016 tax returns still have time to file a protective claim. These individuals should file a protective claim as soon as possible if they want to maintain eligibility for the potential refund.
Who is eligible for a potential refund?
Generally, taxpayers who are subject to the NIIT are individuals with an adjusted gross income greater than $250,000 for married filing jointly or $200,000 single. Additionally, some estates and trusts are also liable for the NIIT. The Additional Medicare Tax impacted some individuals.
What does filing a protective claim entail?
To file a protective claim, you should work with your tax advisor. He or she will guide you through submitting your claim to the IRS. The information required will include your name, address, and tax identification number (TIN), the year of the refund claim, the dollar amount of the claim, and an explanation for the basis of your claim.
I paid one or both taxes in 2016 and filed an extension on my taxes—what should I do?
It may or may not be worthwhile for you to act. There are a variety of factors to consider. First, constitutional experts predict that a repeal of the ACA that includes an invalidation of these tax provisions is unlikely. Second the costs and efforts associated with filing a protective claim and subsequent amended return should the ACA be declared unconstitutional are not insignificant. It comes down to this: if you paid either the NIIT or the Additional Medicare Tax in 2016 and filed an extension, you should evaluate your potential refund against the costs associated with filing a protective claim in order to determine your best course of action.
As always, please do not hesitate to reach out to your Blackman & Sloop tax advisor for advice on your situation. We are here to help.