The ruling in California v. Texas, now pending with the U.S. Supreme Court, may not only eliminate certain taxes moving forward but may also entitle taxpayers to refunds for a portion of taxes paid in recent years. In a 2-1 split vote, the U.S. Fifth Circuit Court of Appeals upheld a decision by a Texas district judge declaring the Patient Protection and Affordable Care Act, commonly known as the ACA, unconstitutional.
If the Supreme Court agrees with the Court of Appeals, taxpayers may be entitled to refunds for the component taxes of the ACA, most notably the 3.8% Net Investment Income Tax (NIIT) and the 0.9% Additional Medicare Tax. For many taxpayers with considerable portfolio investments, the NIIT alone adds tens of thousands of dollars of tax liability annually; to gauge the impact of this tax on your individual 1040, see your Form 8960.
For any given tax year, taxpayers have three years from the time of filing their taxes to file a claim for refund. Because the Supreme Court likely will not issue a ruling on the case until 2021, taxpayers should consider filing a protective claim pending the outcome of the case to preserve the opportunity to seek a refund for ACA component taxes for 2017 and 2018. Note that taxpayers who extended their tax year 2016 filing deadline have until the 2020 date that corresponds to their actual filing date to file a protective claim for 2016. For example, a taxpayer who filed her Form 1040 for tax year 2016 on October 10, 2017 will need to file a protective claim for 2016 taxes by October 10, 2020.
How likely is the Supreme Court to strike down the ACA and its component taxes? It’s complicated. The ACA has survived Supreme Court scrutiny before. In 2012, Chief Justice John Roberts joined a slim majority in upholding the ACA on the grounds that the penalty the law imposed on taxpayers for failing to obtain health insurance was a valid use of Congress’ taxing power. Congress has since reduced that penalty to zero, paving the way for the current lawsuit to argue that the ACA must be struck down since the penalty tax underpinning its legality no longer exists.
Although officially non-political, the four judges to weigh in on the current case thus far have voted along party lines, with all three conservative appointees voting against the ACA. The composition of the Supreme Court has shifted more conservative in recent years with the appointments of Justices Gorsuch and Kavanagh. This trend indicates a strong possibility that the Supreme Court ruling may invalidate the ACA, allowing taxpayers who have filed protective refund claims to recover substantial amounts of tax paid.
Contact your LBMC tax advisor today to discuss filing protective claims to preserve the opportunity to recoup several years’ worth of ACA taxes.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.