Potential Repeal of ACA Medicare Surtaxes:
Protective Claims for Timely Filed 2016 Returns Due by July 15th
briefing by Jill Clark, CPA
Ever since the Affordable Care Act (“ACA”) was enacted over a decade ago, it has faced many legal challenges as to whether or not it is unconstitutional. While it has prevailed over the years and remains pretty much intact, earlier this year the U.S. Supreme Court agreed that they will hear the case known as California v. Texas, another case aimed at deciding whether the law is constitutional or not. It almost goes without saying that should the Affordable Care Act be overturned in its entirety, that nearly all American’s would be impacted in one way or another.
One such impact is the fact that the Medicare surtaxes that were enacted as part of the ACA could potentially be retroactively repealed. The following are the two Medicare surtaxes that many higher income taxpayers have been subject to since the filing of their 2013 income tax returns:
- An additional tax of 0.9% on taxable salary and wages earned in excess of $200,000/single or $250,000/married filing jointly (calculated and reported on Form 8959), and
- An additional 3.8% tax on “Net Investment Income” (i.e., interest, dividends, royalties, etc.) for taxpayers with modified adjusted gross income in excess of $200,000/single or $250,000/married filing jointly (calculated and reported on Form 8960).
These taxes can be quite significant for taxpayers with substantial wages and/or investment income.
So, what does this mean for those that have been paying these taxes over the past several years?
If the outcome of the Supreme Court ruling includes the repeal of these taxes, taxpayers would be entitled to file an amended income tax return to claim a refund of any such taxes paid by that individual.
However, there is a catch. Taxpayers generally must file an amended return within 3 years from the date they filed their original return. This three-year window doesn’t start until April 15th if a taxpayer chooses to file their tax return before the April 15th deadline. This means that for most taxpayers, they could not recoup any Medicare surtaxes paid with their 2013, 2014 and/or 2015 returns since, assuming those returns were timely filed, that three-year window would be closed. However, taxpayers that timely filed their 2016 returns (on or before April 15, 2017) still have until July 15, 2020 before that window closes.
If there is a contingency (i.e., legal proceeding), the outcome of which would impact an individual’s tax liability, the IRS allows a taxpayer to file a protective claim within that same three-year window.
This allows a taxpayer to keep open the three-year window until the legal proceeding is resolved and should it be resolved in the taxpayer’s favor; the IRS will process the protective claim and allow the taxpayer to claim a refund of taxes paid beyond the normal three-year window for filing an amended return.
So again, what does this mean for those that have been paying these taxes over the past several years?
This means that prior to July 15, 2020, any taxpayer that timely filed their 2016 income tax return on or before April 15, 2017 that wishes to keep open their option to claim a refund of any of the ACA Medicare surtaxes that they paid with their 2016 return will need to file a protective claim with the IRS. Those that filed their 2016 return beyond April 15, 2017 will have until 3 years from the date their 2016 tax return was filed, if later than July 15, 2020, to file such protective claim.
So, should you file a protective claim?
First, we recommend you review your 2016 income tax return to determine the amount of Medicare surtaxes paid with your 2016 return, if any. These totals will be reported on Form 8959, line 18 and Form 8960, line 17 (individuals) or line 21 (estates and trusts). The total of these amounts would be the potential refund that could be claimed.
Then, the question comes down to a cost/benefit analysis. If we had a crystal ball and could predict with certainty the outcome of the California v. Texas case, then the answer would be simple. But, unfortunately, there is no crystal ball and all we have to go on is past legal precedent and the current commentary and political/economic environment that we are in. And based on that, it appears that the likelihood of these taxes being retroactively repealed as a result of the Supreme Court’s decision is minimal. Although, if we have learned nothing else in this first half of 2020 – never say never.
We will be monitoring this case as it makes its way through the Supreme Court and provide updates, as necessary, regarding potentially filing protective claims related to the 2017, 2018 and/or 2019 income tax returns.
Please don’t hesitate to reach out to your BRC tax advisor if you have any questions, would like to discuss this situation further or would like to engage us to prepare a 2016 protective claim on your behalf.