AAFCPAs would like to make our clients aware that we are closely monitoring the case of Texas v. U.S., which is challenging the constitutionality of the tax provisions of the Affordable Care Act (ACA). The lower court has found the ACA’s minimum essential coverage provision to be unconstitutional. In that finding, the court raises the question of whether the entire Act is unconstitutional, including those taxes created to fund the provisions of the law. The US Supreme Court (the “Court”) agreed to hear the case earlier this year.
Taxes Under The ACA
As part of the funding for the ACA when it was enacted, several taxes were created. The specific taxes in question are:
- The additional Medicare tax on form 8959. A simple explanation is that this is an additional 0.9% tax on earned income in excess of $200,000 for single filers, $250,000 for married couples filing jointly.
- The net investment income tax on form 8960. This is an additional 3.8% tax on net investment income, imposed on those with adjusted gross income over $200,000 for single filers, $250,000 for married couples filing jointly.
What Does This Mean for Taxpayers?
If the Court rules these taxes to be unconstitutional, there may be a refund opportunity for those who paid these taxes. For a calendar year taxpayer that did not extend their 2016 tax return, a claim for refund for an individual or trust (normally due April 15, 2020) must be filed no later than July 15, 2020 (under Notice 2020-23). For those taxpayers whose 2016 returns were on extension or which have a fiscal year, the claim will be due later in the year.
The Court has indicated it is unlikely a decision will be made before late 2020, or possibly even into 2021. Thus, we may not know the result of this case for some time.
Taxpayers that paid significant amounts of these taxes on their 2016 tax returns may want to consider filing a Protective Refund Claim for the 2016 tax year. You can find how much you paid for these taxes by finding Forms 8959 and 8960 in your copy of your 2016 tax return. If your adjusted gross income (Line 37 on 2016 Form 1040) was less than $200,000 (single) or $250,000 (married), then you did not pay these taxes.
What Does AAFCPAs Advise?
After careful consideration, AAFCPAs has concluded that there is little chance of the tax being declared unconstitutional for tax years before 2019 (2019 is a different analysis, as that is the year the ACA individual health insurance mandate ended under the 2017 Tax Cuts and Jobs Act). We understand that many national CPA firms have reached the same conclusion, and most legal scholars believe a decision finding the entirety of the ACA to be unconstitutional is unlikely. As such, for most clients it may not make sense to go through the expense of filing a protective claim, but please consult your AAFCPAs tax advisor if you feel it may make sense for you.
While we believe it unlikely any Supreme Court ruling will create a refund opportunity for taxes paid in years prior to 2019, we cannot guarantee it will not generate such a finding. Thus, the cost to file a protective claim for tax years 2016 through 2018 may make sense for those taxpayers that paid a significant amount of these taxes, based on the remote possibility that the claim may ultimately succeed.
If you have any questions, please contact Richard Weiner, CPA, MST at 774.512.4078, email@example.com; or your AAFCPAs Partner.