ACA Protective Claim

This is a follow up to our communication on July 15th regarding the filing of a Protective Claim for Refund in the event that certain taxes imposed by the Affordable Care Act (“ACA”) are overturned. We became aware of this issue over the weekend prior to the July 15th filing deadline and responded as soon as we were comfortable with the advice we should communicate. The timing also coincided with the (unprecedented) extension of the tax filing season from April 15th to July 15th. We understand this created a fire drill for all of us, but it was unavoidable.

Background: There is currently a case – California v. Texas – that is scheduled to be heard by the Supreme Court as early as October 2020.  It is our understanding there are three legal issues involved:

1. Whether Texas and the individual plaintiffs who joined the case have standing to bring the lawsuit to challenge the individual mandate;

2. Whether the Tax Cuts and Jobs Act rendered the individual mandate unconstitutional; and,

3. If the mandate is unconstitutional, whether the rest of the ACA can survive.

The decision on the case could come as late as June 2021.

Possible Outcome:It is possible that the Net Investment Income Tax and Additional Medicare Tax, which are part of ACA, will be overturned. We underscore possible to say that no one can reasonably predict how the Supreme Court will rule.

Advice & Action:Some tax practitioners were of the opinion that an amended return for 2016 (Form 1040X) should have been filed in order to preserve a taxpayer’s refund possibility if the above described taxes are overturned. A Form 1040X is a complex and time consuming filing to put together. Also, it must be paper filed (as opposed to electronic filing). Due to the impending July 15th deadline and the cost of filing the Form 1040X, it was not possible to pursue this course of action.

However, we are of the opinion that the Protective Claim document we sent can reasonably be expected to stand as an effective substitute for the Form 1040X filing.  In the event you did not file the claim sent on July 15th, we will be communicating with those clients who actually paid the Net Investment Income Tax and Additional Medicare Tax for tax year 2017 and should therefore file the Protective Claim for Refund for that year.

As noted above, whether a tax refund for the taxes in question will ever materialize is an unknown today.  Filing the Protective Claim for Refund is essentially a no cost approach should the Supreme Court overturn the ACA taxes.



Please let us know should you have any further questions for us.