Oral arguments in California v. Texas will likely occur later this year, which means the Supreme Court will not rule on the case until at least summer 2021. Since the PPACA contains several tax-related provisions, including the 3.8% net investment income tax (NIIT) and the 0.9% additional Medicare tax on earned income, a ruling from the Supreme Court that the PPACA is unconstitutional would have significant implications with respect to taxation. Taxpayers who have paid significant amounts of NIIT and/or additional Medicare tax reported on income tax returns filed within the past three years should consider filing what is known as a “protective claim” in order to preserve their right for a potential refund in the event the Supreme Court rules that the PPACA is unconstitutional.
The NIIT is a 3.8% tax on “net investment income,” which generally includes: (i) capital gain, interest, dividends, certain annuities, royalties, and certain rents (unless derived from a business activity in which the taxpayer materially participates); (ii) income and gains from a business activity in which the taxpayer does not materially participate; and (iii) income and gains from the trading of financial instruments and commodities (whether or not the taxpayer materially participates), in each case subject to exceptions and qualifications in the Treasury Regulations. The NIIT applies to (1) estates and trusts that have undistributed net investment income and adjusted gross income above $12,400 for 2016 (and a similar inflation-adjusted amount for later years, namely, $12,500 for 2017 and 2018, $12,750 for 2019 and $12,950 for 2020), and (2) individuals electing the married filing jointly filing status with adjusted gross income above $250,000 ($200,000 using the single filing status). The additional Medicare tax is an additional 0.9% on wages, salaries, and self-employment income in excess of $250,000 for individuals who elect the married filing jointly filing status ($200,000 using the single filing status).