Earlier this year the US Supreme Court (the “Court”) agreed to hear the case of Texas v. U.S., which is challenging the constitutionality of the tax provisions of the Affordable Care Act (“ACA”). Prior to the Court’s involvement, a lower court previously found that the ACA’s minimum essential coverage provision was unconstitutional. In that same finding, the court also raised the question of whether the entire Act was unconstitutional. This ruling could have significant tax consequences as the Act created new tax provisions to help fund the ACA. Many states remain split on their stances relative to the Act, and most recently the Trump Administration formally asked the Supreme Court to strike down the ACA.
Taxpayers with adjusted gross income (refer to Line 37 on your Form 1040) of more than $200,000 (single) or $250,000 (married) should take notice to the case as a decision is expected over the coming months. If the Court rules the Act to be unconstitutional, there may be refund opportunities available. Specifically, when the ACA was enacted, two new taxes were created:
- Additional Medicare Tax – An additional 0.9% tax on earned income in excess of $200,000 for single filers, $250,000 for married couples filing jointly.
- Net Investment Income Tax – An additional 3.8% tax on most passive income (interest, dividends, capital gains, rental income, etc), imposed on those with adjusted gross income over $200,000 for single filers, $250,000 for married couples filing jointly.
Taxpayers that paid significant amounts of these taxes on their previous tax returns may want to consider filing a Protective Refund Claim for the 2016 tax year. Refer to Forms 8959 and 8960 within your 2016 tax return.
S&G LLP will continue to monitor the case and advise if there are any tax savings opportunities available once the Court rules on the constitutionality of the ACA. However, the belief by most practitioners is that there is little chance of the tax being declared unconstitutional for tax years before 2019.