Along with many other interested parties, we have been watching and waiting to see what happens in a Supreme Court Case which is a challenge to the 2010 Affordable Care Act (ACA), often referred to as Obamacare. The case, California v. Texas (Texas v. United States in the lower courts), is scheduled to be argued later this year.
The ACA not only addressed health care, but ways to help pay for the additional costs. Based on the latest IRS data, there are two of these taxes that each impact over 3 million people annually and raise over $23 billion in taxes each year. The larger of the two is the 3.8 percent Net Investment Income Tax on investment income and capital gains. The other is the .9 percent Additional Medicare Tax on wages and other earned income. These taxes principally apply to taxpayers if their adjusted gross income is over $200,000 if single, or $250,000 if filing a joint tax return, and are imposed on income in excess of these limits.
If the Court rules that the entire ACA is unconstitutional, or even if it is just these tax provisions that get thrown out, then anyone who paid these taxes will be eligible for a refund. However, only tax returns that are still deemed open by the 3-year statute of limitations will be eligible. If your 2016 tax return was filed by the April 15, 2017 due date, the statute of limitations will expire on July 15, 2020. If you filed after April 15th of that year, you have 3 years from the date you filed to file a claim. Unfortunately, these dates may pass before the Court issues their decision.
It is possible to file a protective refund claim before the case is decided. Remember, the IRS will not actually issue refunds unless the ACA is ultimately reversed.
Since much of this case is driven by the removal of the ACA’s individual mandate penalties, which were set to zero in 2019, our view—based on our analysis of this issue—is that the chance of the Supreme Court ruling these tax measures unconstitutional, at least prior to 2019, is unlikely. This opinion is also shared by numerous national CPA firms. Therefore, in most cases, we are not advising that protective refund claims be filed at this time, unless significant taxes were paid.
Some taxpayers, especially those that had large tax bills as a result of these taxes, may want to more actively pursue protective refund claims. Time is of the essence — therefore please call your E. Cohen tax advisor as soon as possible to determine if you should amend your returns.