Texas v. U.S. is scheduled to be heard by the U.S. Supreme Court with the potential of ruling certain Obamacare taxes to be unconstitutional.  Many taxpayers with an AGI over $200,000 for 2016 paid these taxes are computed on IRS Form 8959 and/or Form 8960.  The  Refund Statute Expiration Date (RSED) runs out on July 15, 2020.

Form 8959 added a 0.9% tax on earned income in excess of $200,000 single or $250,000 married-filing-jointly.

Form 8960. added a 3.8% tax on net investment income (NIIT), for taxpayers with AGI in excess of $200,000 single or $250,000 married-filing-jointly.

Trivia: the difference between 3.8% and 0.9% is 2.7%, which is the Medicare portion of the self-employed contributions act tax (SECA)

To see your potential refund, depending on the outcome of Texas v. U.S. go to your 2016 Form 1040, page 2, line 62.  Also look for Forms 8959 and 8960 therein.  (found as attachment sequences 71 & 72 – upper right-hand corner of the form).  If your adjusted gross income (2016 Form 1040, page 1, line 37) was less than $200,000 single or $250,000 married-filing-jointly, then you did not pay these taxes and therefore you would not be entitle to a refund in any event.

If the Court rules that these Obamacare ACA tax provisions are unconstitutional, then taxpayers may be able to file an amended return to claim a refund as long as the statute of limitations is still open for that year. When a tax is ruled unconstitutional, the IRS would generally need to pay a refund even for years that are closed due to the statute of limitations as long as the taxpayer filed a protective claim for refund before the statute of limitations expired.

The statute of limitations for a protective claim for 2016 will expire on July 15, 2020 for taxpayers who filed on April 15, 2017. When you file a refund claim for these 2016 taxes before the statute expires on July 15^th your right to receive a 2016 refund is preserved even if the U.S. Supreme Court rules after the statute of limitations.

The bad news: many folks say that there is very little chance of this tax ever being declared unconstitutional for 2016 . The decision of preparing and filing a protective claim and incurring the time, effort and CPA costs is your own.

If you feel that you would like to file a protective claim for a refund for 2016 (or even 2017 through 2019) despite the relatively slim chance for a refund, please contact us.  If you have paid a significant dollar amount of these taxes for 2016 (or even 2017 through 2019) you might be willing to incur some cost to file the protective claim now just in case the tax might be refundable in the future.

A Protective Claim can be filed on a Form 1040-X marked “Protective Claim – Do Not Process” prominently across the top. The entire tax can be shown as refundable and a full replacement Form 1040 does not need to be attached. What does need to be included is a complete and clear explanation of why and about what legal issue the clam rests and a description of the contingent issue that must be resolved to validate the claim.

If it ensues that the claim is merited, then an actual claim for refund can be filed along with proof of filing and receipt by IRS of the (placeholder) earlier Protective Claim.

The AICPA’s position on protective claims is that taxpayers should be made aware of the situation and the taxpayers should make the decision as to whether to file a protective claim or not; the AICPA does not have an opinion on the merits of the technical issue before the Supreme Court.

If the Supreme Court determines that the ACA (Obamacare) is unconstitutional but does not make it retroactive, the protective claims are not baseless; the protective claims are unperfectable.

The AICPA and almost all of the national CPA firms as well as other major CPA firms have reached the conclusion that there is little chance of the “Obamacare” taxes being declared unconstitutional for tax years before 2019 and recommend that taxpayers not incur the expense of filing protective claims.

Note that filing such claims is not necessarily complicated, so taxpayers should consider this issue and decide if they want to file.  Generally, the Statute of Limitations for refunds coming from a 2016 Form 1040 tax return is July 15, 2020, or 3 years from the date of filing, whichever is later.