US Supreme Court Justice Ruth Bader Ginsburg passed away on Friday, September 18, 2020. Ginsburg’s passing has ramifications upon multiple fronts based on both her iconic presence and long-term judicial standing.
With Ginsberg’s death, one of the many issues now in question is the future of the Affordable Care Act (ACA). While Ginsberg was alive, efforts to strike down the ACA were defeated due to the alignment of the four liberal justices (including Ginsburg) along with Chief Justice John Roberts. Now, the Court is set to review another case that has the potential to invalidate the ACA.
What does the ACA have to do with individual tax returns?
The main funding mechanism of the ACA is the Net Investment Income Tax (NIIT), a surtax that was passed as part of the ACA legislation. The NIIT levies an additional 3.8% tax on certain investment income, such as interest, dividends, capital gains, and rental income. In addition, the ACA included a 0.9% Medicare surtax. These taxes apply to certain high earners (those whose incomes exceed $250,000 for married filing jointly, $125,000 for married filing separately, or $200,000 for single filers).
Since 2013, taxpayers with incomes above the specified thresholds have been required to calculate and pay the NIIT and Medicare surtax as part of their Form 1040 tax returns each year. Now, Ginsberg’s passing creates another wrinkle in the long-term viability of these taxes.
If the ACA is invalidated, then taxpayers may seek refunds of past taxes paid.
If the US Supreme Court finds the ACA unconstitutional, the ACA may be repealed in its entirety, resulting in the repeal of the NIIT and additional Medicare surtax.
If the taxes are repealed, then taxpayers who have paid these taxes on prior returns may voluntarily seek refunds of some or all of the prior NIIT and Medicare surtax paid. To do so, taxpayers would generally need to file amended tax returns for tax years still within the statute of limitations period for refunds (tax years 2017, 2018, and 2019, for most taxpayers). Alternatively, the IRS may offer a special path to requesting the refund of these taxes, such as a new form that is submitted with the 2020 tax return.
When will we know?
The latest effort to strike down the ACA is the case of Texas v. United States 945 F. 3d 355 (5th Cir. 2019). This case is set to be heard by the US Supreme Court in November 2020, one week after US Election Day. Without Ginsburg, there are now eight remaining justices on the Supreme Court and four potential “likely” outcomes to how this case may play out:
- The Court could deadlock at 4-4, which in turn would mean the Affordable Care Act would survive. This would be the likeliest outcome if the case is heard in November.
- The Court could decide the case in favor of keeping the Affordable Care Act, 5-3. This is highly unlikely given the current composition of the justices without Ginsburg.
- The Court could decide the case against the Affordable Care Act, 5-3. This is also highly unlikely given the voting history of Chief Justice John Roberts.
- The Court could extend the hearing of this case until the newest Supreme Court justice is finally appointed and confirmed. This would extend the case to be heard later in 2021. The ultimate outcome would then be determined by the newest justice confirmed to the Court.
The outcome will affect both your past and future tax returns.
The Texas case is a very important case for how taxpayers and tax professionals will deal with the Net Investment Income Tax both in prior years and the upcoming tax year. At a minimum, the case will have an impact on individual tax rates on investment income, including interest, dividends, capital gains, and rental income. And it will determine what refunds are available for prior-year amounts paid.
For taxpayers with more complex situations, the implications may carry through to the tax treatment of other items, as well. For instance, the case outcome may affect tax rates for owners of controlled foreign corporations (CFC), including their global intangible low-taxed income (GILTI) tax, Section 965 Repatriation Tax with a Section 962 election, and future realized dividends. For individuals considering giving up their US citizenship or long-term green cards, the outcome could affect their expatriation and mark-to-market Exit Tax.
The Wolf Group will continue to monitor the changes and updates to this case and provide alerts and blog posts, as needed.