Should You File a 2016 Protective Claim for Refund by July 15, 2020?

July 8, 2020 | Article

There has been extensive discussion recently about a potential change in the Affordable Care Act (ACA) and related taxes. This fall, the U.S. Supreme Court is scheduled to consider the case of California v. Texas. One of the possible outcomes of that case is that the entirety of the ACA, including related taxes, could retroactively be found unconstitutional as result of the elimination of the penalty, starting in 2019, for not carrying health insurance.

A Potential Refund of ACA Taxes
We consider this outcome to be remote, but there is an outside chance that this could create a refund opportunity for those individuals who paid ACA taxes in tax years that remain open under the statute of limitations. This would include the additional 0.9% Medicare tax on earned income and the 3.8% net investment income tax. 

Generally, an individual whose adjusted gross income exceeds $250,000 married filing joint or $200,000 single is subject to these taxes. Estates and trusts with adjusted gross income in excess of the dollar amount at which the highest tax bracket begins can also be subject to the 3.8% net investment income tax.

What You Need to Do to Prepare for a Potential Protective Claim Refund
Although we believe this is an unlikely result for various reasons, we feel it is prudent to inform you of this possibility. However, a taxpayer must file a protective claim prior to the closing of the statute of limitations in order to be eligible for the refund of taxes. The statute of limitations for 2016 returns that were filed by April 15, 2017 will close on July 15, 2020.

After careful consideration, we believe that filing a protective claim for 2016 is NOT appropriate in most cases. Most legal scholars believe a decision finding the entirety of the ACA to be unconstitutional is unlikely, particularly with respect to tax years beginning before 2019 when the relevant change to the penalty for not carrying health insurance became effective. This low likelihood of success does not appear to justify the costs and effort that will be required to file the protective claim in the typical case. To our knowledge, most major CPA firms are taking a similar position.

It is your decision whether to file a protective claim for refund. If you choose to file, please make sure to work alongside a knowledgeable CPA to help with this filing.

Compliance with the ACA and its various components is critical.

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