If Supreme Court Finds 2010 Affordable Care Act Unconstitutional, IRS Could Owe You A Tax Refund

By Tom Bassett, J.D., CPA
July 14, 2020

You may recall back in 2010 that the collective political conscious of the country was focused on the passage of the comprehensive health care reform law called the Affordable Care Act (ACA).

Recently, the Supreme Court of the United States agreed to hear two cases related to ACA’s constitutionality – “Texas v. California” and “California v. Texas”, and there is a chance the law could be struck down, setting up a scenario where the Internal Revenue Service could owe some taxpayers a refund of overpayment of taxes paid to fund ACA.

The cases are on the Supreme Court calendar for the 2020‐2021 term, which means that a ruling is expected sometime by midyear in 2021.

However, deadlines to possibly participate in any refund are quickly approaching for tax years 2016 through 2019, including one this week for the 2016 tax year on Wednesday, July 15.

No one knows how the cases will ultimately be decided, but it may be in taxpayers’ best interests to consult with their tax advisors quickly to see if you qualify. You can then file what is called a “protective claim” to alert the IRS that you may have a refund owed to you.

More Detail
If the Supreme Court decision is favorable and you are owed a refund of these taxes, you can review your possible refund by revisiting Form 8960 (3.8% tax on Net Investment Income) and Form 8959 (0.9% tax on wages and self‐employment income). These taxes apply to both individual income taxpayers (Form 1040) and trust/estate income taxpayers (Form 1041). The tax assessments in question apply to single filers with an Adjusted Gross Income of $200K or more and $250K and up for married filers, filing jointly.

Should the Court deliver an opinion that upholds the ACA in whole or in part, and the tax remains in place, the IRS will just file the protective claim away and no further action is required.

As mentioned above, if an individual Form 1040 filer paid any of taxes related to ACA for 2016, the statute of limitations to amend the Form 1040 and claim a refund will expire shortly. The statute of limitations on 2016 will expire on Wednesday July 15, 2020. For 2016 returns filed using an extension, the statute of limitations to amend generally expires three years from the date of filing, but no later than October 15, 2020.

Since ACA is still in force in 2020, individuals cannot currently file an amended return for 2016. This is why individuals should file a “protective claim” with the IRS to maintain the option to file an amended 2016 return to claim refunds of these taxes if the Court invalidates those provisions.

Relative to 2017 returns, taxpayers might also consider filing a protective claim as the statute of limitations to amend your 2017 return could expire before the Court issues a decision in these cases. You can make the protective claim for both 2016 and 2017 on the same letter to the IRS. Correspondence must be mailed to the IRS Service Center where you filed your return for those years.

Commerce Trust clients are welcome to contact their Private Client Advisor with any questions about this matter. Or taxpayers can contact their tax professional as needed.

Download Our Sample Protective Claim

*Always consult with your CPA and professional advisor on matters involving taxes.

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