If SCOTUS Rules Against ACA It Could Trigger Tax Refunds

July 14, 2020 | By: Robert A. Green, CPA

By CPAs Darren Neuschwander and Robert A. Green

If you paid the Affordable Care Act (ACA) Medicare surtaxes on unearned or earned income in 2016 through 2019, you might be eligible for a potential tax refund if the Supreme Court of the United States (SCOTUS) rules against ACA. SCOTUS agreed to take the ACA case, and experts expect a decision in early 2021. Traders have unearned income, and they pay the ACA 3.8% Medicare surtax on net investment income over the AGI threshold (see below).

Act fast for 2016
Some taxpayers need to act fast before SCOTUS renders their decision about ACA. If you paid ACA taxes on your 2016 income tax return and filed that return by its original due date of April 18, 2017, then consider submitting a “protective claim for refund” due by July 15, 2020. That’s the date the 2016 tax year closes, three years from April 18, 2017, the original tax return deadline, plus the three-month postponement under the CARES Act. A protective claim for refund extends the deadline for purposes of this ACA refund, giving you ample time to react to the SCOTUS decision. If you miss the July 15, 2020 deadline, at least you can still submit the protective claim for 2017, 2018 and 2019,

If you filed an extension for 2016 taxes, extending the deadline six-months until October 15, 2017, you have three years from the actual filing date up to October 15, 2020. For example, if you filed your 2016 income tax return on August 30, 2017, the tax year closes three years later on August 30, 2020.

There’s no rush to submit a protective claim for refund of ACA taxes for 2017, 2018, and 2019 tax returns. The 2017 tax year would close April 15, 2021, unless you filed a 2017 tax extension until October 15, 2018, in which case the year closes three years after filing date.

ACA taxes and potential refunds
If SCOTUS rules against ACA, it could trigger this refund opportunity for ACA taxes paid in 2016 through 2019.

These ACA taxes include the 0.9% Medicare Surtax on earned income (Form 8959) and 3.8% Net Investment Income Taxes on unearned income (Form 8960) for 2016 through 2019. The ACA net investment tax applies to individuals with net investment income (NII) and modified adjusted gross income (AGI) exceeding $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately. ACA law does not index the threshold for inflation.

Filing a protective claim ensures that if SCOTUS invalidates ACA taxes, taxpayers who paid them could formalize a refund request, even after the amended tax return filing deadline closes. Congress could enact a statute that would allow (or require) the IRS to issue refunds for closed tax years even without filing a protective claim.

We cannot assess the likelihood that these ACA taxes will be deemed unconstitutional retroactively to these years, but we wanted to bring the possibility to your attention.

Here’s a template of the informal protective claim for refund if you decide that you would like to submit it to the IRS for tax year 2016. It should be mailed (preferably by certified mail, return receipt, if available at your local post office) to the IRS service center within the PDF file based on your current mailing address.

We are available for questions on this matter after July 15, 2020, the postponed tax deadline.

Adam Manning CPA contributed to this blog post.

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