A recent decision by the U.S. Supreme Court to hear a case challenging the constitutionality of the Affordable Care Act (ACA) could result in a refund of some portion of taxes paid for either the Additional Medicare Tax and/or the Net Investment Tax on your income tax returns in prior years.
Taxpayers who in the last few years have paid the extra 0.9% Medicare tax on wages or self-employment income, or the 3.8% tax on net investment income may be able to claim a refund of these taxes.
The question that must be addressed before taking this action is whether or not it is appropriate to file the protective claim for 2016 and/or 2017. But the clock is ticking. A protective claim must be filed by the closing of the statute of limitations in order to be eligible for a tax refund. The statute of limitations for 2016 returns that were filed by April 15, 2017 will close on July 15, 2020.
Below are some details to help you make the decision that is right for you.
- Taxpayers only have three years from the original due date of the return to claim refunds. For timely filed 2016 tax returns, the 3-year window closes on July 15, 2020. Given the final decision in this case is not expected to occur until early 2021, there is a risk of losing the opportunity to claim a refund of these taxes paid with 2016 and/or 2017 income tax returns.
- It is highly unlikely in our opinion that filing a protective claim would be appropriate in most cases. This is because most legal minds believe that even a decision resulting in the entire ACA being deemed unconstitutional would be effective from the date the individual mandate penalty was repealed, which was January 1, 2019. However, if your combined Additional Medicare Tax + Net Investment Income Tax rises to a certain level (for example $1,750 and above) it may be worthwhile to go ahead and file a protective claim in order to preserve the potential to claim a refund. If you choose to proceed, you need to file a Protective Claim for Refund letter.
- It is important to note that the Protective Claim for Refund letter only serves to extend the period of time for which you may claim a refund if the court case is resolved favorably to taxpayers. If approved, an amended tax return would be required at a later date to obtain any refund.
Again, we do believe it is highly unlikely that a refund will occur, but for certain circumstances, it makes sense to err on the side of caution and file the documentation. Our team of professionals are on hand to help you navigate this refund process and have a template letter that you can use. Start here.