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Did you pay Additional Medicare and Net Investment Income Tax Beginning in 2016? Consider Filing Your Protective Claim

The United States Supreme Court recently agreed to hear the highly publicized case determining if the elimination of the Affordable Health Care Act (“ACA”) individual mandate renders the entire Act unconstitutional. Taxpayers who paid Additional Medicare and Net Investment Income Tax beginning in 2016 could be entitled to a refund if the Court rules ACA unconstitutional and retroactively repeals the tax. For individuals to protect their right to this refund, we are advising clients who have paid ACA taxes to evaluate preserving a refund claim until the matter has been adjudicated. Taxpayers can wait, but the timeframe for claiming a refund of 2016 taxes has expired or will expire very soon. Anyone who qualifies and is interested in protecting the right to this refund should contact their tax professional as soon as possible.

Why is this happening?

The ACA requirement to maintain personal health insurance coverage is in the form of a penalty referred to as the individual mandate. Previously, the Supreme Court ruled in 2012 the ACA individual mandate was constitutional under the Federal power to tax. However, the 2017 Tax Cuts and Jobs Act (“TCJA”) reduced the individual mandate penalty to zero. Since then, the 5th U.S. Circuit Court of Appeals ruled the ACA individual mandate unconstitutional stating, “it can no longer be read as a tax.”  The Supreme Court will now ultimately decide in pending case California, et al., Petitioners v. Texas, et al., No 19-840:

1. If the ACA individual mandate is unconstitutional because TCJA reduced the penalty to zero in accordance with the Circuit Court ruling; and
2. If that decision then causes the entire ACA to be unconstitutional.

It is not ultimately clear if the ruling will apply retroactively to 2016, but we do know that without action those taxes will not be available to claim a refund. Generally, the time to claim a refund on a prior year return expires three years after you filed your personal or trust federal income tax return. A Protective Claim for Refund can be filed to extend the statute of limitations to claim a refund when your refund is contingent on the outcome of a pending Supreme Court case.

How Much is My Potential Refund?

There are two taxes potentially refundable. First, if you paid Additional Medicare Tax in 2016, the amount is found on Form 8959, Part IV, Line 18. Second, your 2016 Net Investment Income Tax paid is found on Form 8960, Part III, Line 17. The total of both taxes is your potential refund amount in the event Court rules favorably. If you paid these taxes in 2016, you can protect your ability to claim your refund by filing a Protective Claim for Refund.

What is the Process?

If you filed an extended personal or trust tax return in 2016, you have until three years from the date you filed to qualify for a Protective Claim for Refund related to the ACA taxes paid. Thereafter, if the court rules favorably then you perfect the claim filing a formal amended tax return after. We hope the Protective Claim for Refund is not necessary for years 2017 and beyond but this is dependent on the timing of the Court’s ruling.

What are the other considerations? 

It is a best practice to understand any uncertain tax exposure within positions on originally filed returns. Generally, filing the Protective Claim for Refund a week or less before the general statute of limitations expires can mitigate these types of risks. The IRS cannot audit and adjust your taxes after the expiration of the statute of limitations, but there is a special set of rules allowing the IRS to examine anything on your returns for a limited period of time and offset the refund claim. There are additional special circumstances that extend the statute of limitations beyond the typical three-year timeframe. Although these circumstances exist, we advise that the protective claim for refund remains and should be considered.

What should I do?

If you are unsure if you qualify or need help through the process, contact Justin May or your Richey May tax professional.