Let’s connect!

Protective Refund Claims for ACA-Related Income Taxes

Naya Pearlman, J.D., LL.M.

7.2.2020 | Client Alert

The U.S. Supreme Court recently announced that it will hear a case that challenges the constitutionality of the individual mandate under The Patient Protection and Affordable Care Act (ACA).1 It is possible that if the individual mandate is held to be unconstitutional, income taxes established under the ACA may be effectively repealed. Accordingly, any ACA-related income taxes paid in prior years may be refundable if a claim for refund is timely filed.

By way of background, income taxes established under the ACA went into effect in 2013 and include the Net Investment Income Tax (NIIT), which applies at a rate of 3.8% to certain net investment income of individuals, trusts, and estates. For the NIIT to apply, taxpayers must have both net investment income and modified adjusted gross income over the following thresholds.

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separately $125,000
Single $200,000
Head of household $200,000
Qualifying widower with dependent$250,000

In addition, the ACA tax includes a .9% Additional Medicare Tax, which applies to individuals’ wages, compensation, and self-employment income that exceed the above threshold amounts for the individual’s filing status. These individual threshold amounts are not adjusted for inflation. For taxable estates and trusts, the 3.8% NIIT tax applies to the lesser of their undistributed net investment income or the excess of adjusted gross income over the dollar value at which the highest tax rate starts to apply. For example, in 2016, the highest trust income tax bracket began at $12,400. These brackets are indexed for inflation.

Although it is uncertain whether the ACA will be invalidated in part or in its entirety and a Supreme Court decision is not likely before the Presidential election, taxpayers who have paid significant ACA-related income taxes may want to incur the cost of filing a protective refund claim while the case is pending before the Supreme Court. A protective refund claim must be filed to preserve the taxpayer’s right to claim a refund when the right to the refund is contingent on future events and may not be determinable until after the statute of limitations expires.

In general, the period of limitation on filing a refund claim is 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid.

Therefore, taxpayers who want to preserve their right to a refund should consider filing a protective refund claim for the 2016 tax year (and possibly the 2017 tax year) where the statute of limitations would likely run before the case is decided. For taxpayers who filed their 2016 tax returns by April 15, 2017, the protective refund claim is due by July 15, 2020.

We recommend that you contact your Berdon tax advisor before the statute of limitations expires if you are interested in filing a protective refund claim.

Berdon LLP New York Accountants

1 California v. Texas, No. 19-840; Texas v. U.S., No. 19-10011 (5th Cir. Dec. 20, 2019), cert. granted (U.S. March 2, 2020.)