Uncertain Future for the Affordable Care Act Brings the Possibility of a Tax Refund

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July 15, 2020 Deadline for Taxpayers to File Protective Refund Claims

The Affordable Care Act (ACA) was a key piece of legislation in 2008 that expanded healthcare coverage for Americans. From the beginning, ACA’s constitutionality has been questioned; and each time ACA has been challenged, it’s held up in Court. The new case before the Supreme Court may overturn some or all of ACA and could have far-reaching implications for taxpayers if some or all of ACA is declared unconstitutional.

Timing

ACA created several taxes but has been funded in part by the individual mandate. The mandate was created as a tax for individuals who chose not to carry minimum essential healthcare coverage. As of January 1, 2019, the mandate, or penalty as it is also known, was eliminated through the Tax Cuts and Jobs Act (TCJA).

In 2018, Texas led a group of then-20 states in litigation against the federal government, challenging that the entire ACA was unconstitutional. The case, Texas v. US, will be heard by the Supreme Court and pits 18 states against the federal government. In 2012, ACA was ruled constitutional based on the federal government’s right to impose taxation. Since TCJA removed the penalty, the argument is that the ACA, in its entirety, would be struck down.

The Supreme Court has agreed to hear the case sometime in October 2020, and it is still unclear when ACA would be considered ineffective if the case goes that way. There are a lot of unknowns; if ACA is struck down completely or partially, taxpayers may have an opportunity to request refunds of ACA taxes paid for all 2016 individual and trust returns.

July 15, 2020

This is the date by which affected taxpayers must file a protective refund claim if they wish to request a refund of ACA taxes paid in 2016 – depending on the Supreme Court’s decision this fall. July 15, 2020, is the date that the statute of limitations expires for 2016 tax returns filed by April 15, 2017.  It’s a bit of a preemptive move because the outcome is uncertain. Thus, to be considered for a potential refund, the claim must be received even if a decision is reached after the statute of limitations expires.

Should I File a Claim?

For most taxpayers, it depends.  The general opinion is that the chance of the ACA individual mandate being declared unconstitutional before January 1, 2019, is small. Filing a protective refund claim takes time and additional expenses can be incurred with your CPA in doing so.

However, there are some high-net-worth taxpayers who paid significant ACA-related taxes in 2016.  For these individuals, it may make sense to consider filing a claim. To decide for yourself, add up the amount of Medicare and net investment income taxes on your individual and trust returns for 2016.

The Medicare tax is a 0.9% tax on earned income of $200,000 or $250,000 (single or married filing jointly, respectively) or more. You can locate the amount you paid on Form 8959. The other taxable amount to look for is an additional 3.8% imposed on net investment income for taxpayers making more than $200,000 or $250,000, again single or married filing jointly. You can find the amount of NII you paid on Form 8960. 

If you need help deciding whether to file a protective refund claim, contact our office for an analysis of your 2016 tax return and taxes paid.