If you pay Net Investment Income Tax and/or Additional Medicare Tax, you may be able to get it back


In last week’s post, we discussed the statute of limitations for refunds. Little did I know, when I wrote about this topic last week, how relevant it would be to today’s issue of CBP.

Last week, the Trump Administration asked in a legal brief presented to the Supreme Court, to invalidate the entirety of the Patient Protection and Affordable Care Act, aka ACA or Obamacare.

Back on March 2, the Supreme Court had agreed to hear the case California vs. Texas, a case that challenges the constitutionality of the Affordable Care Act. Back then the case was expected to be argued as early as October this year, but delays are likely due to the pandemic.

The three questions that the Supreme Court has agreed to review in this case are:

  • Whether Texas and individual plaintiffs have standing to bring the lawsuit to challenge the ACA’s individual mandate
  • Whether the Tax Cuts and Jobs Act of December 2017 rendered the individual mandate unconstitutional by eliminating the Shared Responsibility Payment, aka Obamacare penalty
  • Whether, if the mandate is ruled unconstitutional, the rest of the ACA can remain in force or the law in its entirety is invalidated

If the Supreme Court decides that the ACA must be overturned, 23 million Americans are expected to lose their health insurance. This result, which has the potential of being very disruptive under normal circumstances, can be devastating during a pandemic.

Personally, I wouldn’t like to see any fellow American lose their health care, particularly at this time. However, we are not discussing this case for its potential implications on the health welfare of our nation. This is a tax newsletter, after all.

The reason I am addressing this case here is because, if the ACA is overturned, this would invalidate two surtaxes that were enacted by this law, to cover the cost of the health insurance Premium Tax Credit subsidies aimed at making health insurance premiums affordable for lower income families.

The two surtaxes introduced by the ACA were the Net Investment Income Tax and the Additional Medicare Tax. These two taxes apply to taxpayers with incomes above $250,000 if they are filing a joint return with their spouse, $200,000 if they are unmarried, and $125,000 if they are married filing a separate tax return from their spouse.

The Net Investment Income Tax (NIIT) is a 3.8% tax that applies over Net Investment Income. Net Investment Income is income from investment assets such as stocks, bonds, bank deposits, investment funds and rental property, net of investment related expenses.

The Additional Medicare Tax is an additional 0.9% tax that applies on wages above the same thresholds.

US individual taxpayers living in the USA are subject to both taxes if they receive compensation for services, they have net investment income, and their total income is above the relevant thresholds.

US expats are subject to the NIIT if their income is above the threshold and they have net investment income. They may also be subject to the Additional Medicare Tax if they work for a US employer in a country that does not have a Totalization Agreement with the USA, and their wages or self-employment income is above the threshold.

This tax does not apply to foreign wages or compensation if the US taxpayer works for a foreign employer or in a country that has a Totalization Agreement with the USA. In that case, the compensation is covered under the foreign country’s social security system, and it is not subject to Medicare tax. As its name indicates, the Additional Medicare Tax builds on top of the Medicare Tax, and therefore is only relevant when the income is subject to Medicare tax in the first place.

For US expats, one of the biggest frustrations with the Net Investment Income Tax is that, although it is an income tax, as its name indicates, it cannot be offset with foreign tax credits.

When US expats have investment income that is taxed first in their country of residency and then by the USA as their country of citizenship, a credit against the US tax is allowed for the foreign income tax already paid on that investment income. The Net Investment Income Tax cannot be offset by foreign tax credits, essentially resulting in double taxation.

If the Supreme Court rules for Texas, finds the ACA unconstitutional and repeals the law, the Net Investment Income Tax and the Additional Medicare Tax that are part of the ACA would also be repealed. If the ACA is repealed, and the NIIT and Additional Medicare Tax are repealed, anyone who paid NIIT and/or Additional Medicare Tax since the inception of the ACA would have the right to a refund of these taxes for the years for which the statute of limitations hasn’t expired.

As we discussed last week, the statute of limitations for refunds generally expires three years from the filing date of a tax return. Anyone who paid the NIIT and/or the Additional Medicare Tax in 2016, therefore, generally has until July 15th to claim the refund from this tax.

The outcome of the lawsuit won’t be known until after July 15 , though.

What is one to do?

Can anything be done to preserve the right to this refund, should the Supreme Court invalidate the Affordable Care Act later this year, as unlikely as this may be?

The answer is YES.

The way to preserve the right to the refund of 2016 NIIT or Additional Medicare Tax is to file a Protective Claim for Refund before the statutory deadline, i.e.,  BEFORE JULY 15, to preserve the right to file an amended return to claim this refund after the Affordable Care Act is repealed, if that happens.

The IRS provides instructions as to how to file a Protective Claim for Refund on their website. In order to be valid, the Protective Claim must:

  • Be in writing and signed,
  • Include your name, address, SSN or ITIN, and other contact information,
  • Identify and describe the contingencies affecting the claim (Pending Supreme Court case)
  • Clearly alert the IRS to the essential nature of the claim, (repeal of NIIT and Additional Medicare Tax), and
  • Identify the specific year(s) for which a refund is sought (2016-2019, as relevant)

The IRS asks taxpayers to mail the protective claim for refund to the address listed in the instructions for Form 1040X, under Where To File. Generally, the IRS will delay action on the protective claim until the contingency is resolved.

How do you know if you paid any of these two taxes and if you should file a Protective Claim?

Open your 2016 tax return and look for Forms 8959 and 8960. Form 8959 is used to calculate the Additional Medicare Tax, and Form 8960 is used to calculate the Net Investment Income Tax. Then add the amounts on line 21 of Form 8960 and line 18 of Form 8959 to determine your total NIIT + Additional Medicare Tax. This is the amount that would be at stake if you don’t file a Protective Claim and the Supreme Court were to invalidate the ACA after July 15th. If the ACA is overturned, you would also have the right to claim a refund for NIIT and Additional Medicare Tax paid in 2017, 2018 and 2019, so pay attention to those amounts too. You can then decide if it is worth it to you to prepare and submit this Protective Claim.  

And with this tip, pun intended in reference to our phrase of the week at the top of this newsletter, I leave you to enjoy the rest of your weekend.

Much love,


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