The Supreme Court and Affordable Care Act Constitutionality - Protecting Your Ability to Recover Prior Year Federal Taxes

The U.S. Supreme Court has agreed to hear a case regarding the constitutionality of the Affordable Care Act (ACA).  Without going into all the details, two of the questions before the Court are whether the Tax Cuts and Jobs Act (TCJA) rendered the ACAs individual mandate unconstitutional and, if yes, whether the rest of the ACA is also unconstitutional.  The case is not expected to be heard until later in 2020, possibly not even until after the election, and a decision by the Court could come as late as June 2021.  The importance of the decision affects not only the workings of the health care system in the U.S. but could impact the liability for certain taxes imposed on many higher income taxpayers.  

As part of the ACA, the Net Investment Income Tax and the Additional Medicare Tax were added to the Internal Revenue Code and affect higher income taxpayers.  If the Supreme Court should rule that the entire ACA is invalid, these two taxes would also be invalid, and taxpayers could be in position to claim a refund of these taxes for tax years still open under the Statute of Limitations.

Unfortunately, there can be no degree of certainty as to how the Supreme Court will decide.  Even if the court finds the ACA unconstitutional, it could only impact returns filed in earlier years if it is declared unconstitutional in periods before the TCJA enactment.  At this time, it appears unlikely that the finding would be retroactive to periods preceding the TCJA and therefore no immediate action would be required. 

However, while waiting for a decision, taxpayers with substantial ACA related tax liabilities may still desire to protect their ability to receive refunds for the above taxes before the statute of limitations closes with respect to open tax years.  This protection is obtained by filing a timely protective refund claim with the Internal Revenue Service. 

The Statute of Limitations for the 2016 tax year will close on July 15, 2020 for taxpayers filing their original 2016 return by April 15, 2017.  For taxpayers filing extended returns, the 2016 statute will generally be open for 3 years from the filing date of their 2016 return.  For 2017 returns, the statutes will not begin to close until 2021 so additional time is still available to make that decision. 

If you would like to discuss this issue and opportunity further, please contact your Schneider Downs tax advisor.