In the case of California v. Texas, the U.S. Supreme Court agreed to hear an appeal regarding the constitutionality of the 2017 removal of the individual mandate provision from the 2010 Affordable Care Act (ACA). The removal had the effect of imposing a penalty of zero on individuals that did not buy health insurance. A decision from the Supreme Court is expected by the summer of 2021.
There is a potential federal income tax refund opportunity relating to the Supreme Court’s decision. If the Supreme Court invalidates the above provision, and finds that such provision is not severable from the rest of the ACA, then the Supreme Court could invalidate the entire ACA. If it does that, then a knock-on effect would be to eliminate the 0.9% increase in Medicare tax on wages and the 3.8% tax on net investment income, both of which were enacted as part of the ACA.
If you paid these taxes in 2016, and want to protect your right to claim a refund for such taxes, then you would need to file a protective refund claim (i) by July 15, 2020 if you filed your 2016 federal income tax return by April 17, 2017, and (ii) by the earlier of the date you filed your return or October 16, 2020 if you timely filed your 2016 federal income tax return on extension.
Many commentators believe the Supreme Court is unlikely to invalidate the ACA retroactively, and thus these two taxes. We share this view, but because it is not clear, we present this information so you can make your own decision based on your individual circumstances, including your view of the Supreme Court’s likelihood of invalidating the ACA, the amount of tax in issue in your particular case, and the cost of filing a protective refund claim. If you do file a protective refund claim, you might decide to include the 2017 and 2018 tax years as well, but there is no urgency to file these years now.
If you want to file a protective refund claim, Withum can help you prepare it. Please reach out to your Withum tax advisor for more information or to discuss this further.