High-income taxpayers scrambled to file their 2016 taxes on Wednesday to secure a potential refund if the Affordable Care Act is overturned later this year or next.
These taxpayers are hoping that the Supreme Court eventually rules that the entire ACA — including the Net Investment Income Tax, or NIIT — is unconstitutional. That could mean some taxpayers who paid the NIIT in previous years may be eligible for a refund going back to 2016.
“Many taxpayers are filing ‘protective claims’ to essentially hold their place in line for a refund, in the event the NIIT is ruled unconstitutional,” Mike Savage, CEO of 1-800Accountant, told Yahoo Finance. “If the taxpayer does not file a protective claim, they potentially may not be able to claim the refund after July 15, 2020, for the 2016 tax returns, in the event that the ACA is invalidated in the future by the Supreme Court.”
The Internal Revenue Service generally allows a taxpayer to go back only three tax years to claim a refund. That means July 15 — the extended tax deadline this year — is the last day to claim a refund for 2016 tax returns.
What is the NIIT?
In 2010, the Health Care and Education Reconciliation Act, which amended the Affordable Care Act, created a new tax known as the NIIT of 3.8% along with the Additional Medicare Tax of 0.9%.
The levies tax income from capital gains, dividends, royalties, and some annuities and applies to individuals with income that exceeds $200,000 and couples filing jointly with income of $250,000 or more. These kicked in for high-income earners starting in 2013.
While President Donald Trump’s Tax Cuts and Jobs Act of 2017 reversed many ACA provisions — such as the healthcare coverage penalty — the NIIT remained in place.
The Supreme Court this fall will hear a case challenging the constitutionality of the ACA. If the ACA is ruled unconstitutional in its entirety, it’s possible — but not guaranteed — that the NIIT will also be impacted by the decision, even though it’s not technically part of the original ACA.
That would mean taxpayers who paid the NIIT may potentially be entitled to a refund.