5 Questions About the Obamacare Tax for Expats

5 Questions About the Obamacare Tax for Expats
April 14, 2014

Obamacare, or the Affordable Care Act, has gone into full effect and there are still many questions about the penalty tax for expats. Under Obamacare, all Americans must hold the minimum essential coverage as defined by the plan or be assessed a penalty on their Federal Tax Return. This has caused confusion for expats, as they are not living in the US so they can’t enroll in a plan, yet there are situations where Americans abroad are unable to qualify for an exemption to the Obamacare provisions. If you don’t qualify for the Foreign Earned Income Exclusion, you will not be exempt from Obamacare (as the Act uses the same criteria to qualify for an exemption from the plan). Here are 5 common questions about Obamacare for expats.

1.      I’m moving back to the US. How quickly do I have to enroll in an acceptable insurance program to avoid penalty taxes?

Returning from another country or even moving within the United States is considered a ‘qualifying event’ so you have 60 days to enroll in a new plan. Provided you enroll in a plan that meets the ‘minimum essential coverage’ as outlined by the policy’s provisions, you will not incur a penalty during that 60-day grace period. Other qualifying events include having a baby, adopting a child, getting married or divorced or losing employer-sponsored insurance.

2.      I am moving back to the US in June and will have missed the open enrollment period. Can I still enroll in a plan?

Yes! While the official enrollment period closed on March 31, 2014, you still have the 60-day grace period based on your move being a qualifying event.

3.      I will be spending the summer in the US and returning to the UK in the fall. Am I required to have coverage for the 3 months I will be in the US?

This answer is a bit trickier. Under Obamacare, those with gaps in coverage of 3 months or less will not be penalized. So if you return to the US for 3 months, you won’t be penalized for those months. However, spending 90 days in the US will impact your ability to qualify as an expat in 2014, which is critical to being exempt from the Obamacare provisions even while you are living abroad. Using the Physical Presence test, you must be outside the US for 330 of any 365-day period to avoid Obamacare’s requirements.

If you return to the UK in September, you won’t qualify as an expat for 2014 since your tax return is due in June and you would have spent too many days in the US. If you are planning to remain abroad for 330 of the next 365 days, then you can file for an extension, which gives you until October 15, 2015 to file. Assuming you do remain abroad for at least 330 days, you will qualify as an expat at this point and will avoid the Obamacare tax penalty on your 2014 tax return.

4.      I don’t yet qualify as an expat via the Physical Presence test or Bona Fide Residence test. Can I enroll in a qualifying plan in the US to avoid paying the penalty?

Generally no, but there are exceptions! According to an expert on the Marketplace helpline, you must be a resident of the state where you apply for coverage. If you are living abroad and your tax home is now in your host country, you won’t be able to do this.

However, you can obtain coverage in the US if you use the US address of family or friends in the state you expect to reside in when you return. The only catch here is that you must apply for coverage during the open enrollment period, which closed March 31, 2014. The next enrollment period runs from November 14, 2014 through January 15, 2015. Of course, if you actually return to the US between open enrollments, the move is a qualifying event and you have 60 days to enroll without penalty.

5.      What are the penalties for not complying with Obamacare?

The penalties for not holding the minimum essential coverage in 2014 is the greater of $95 per adult per year and $47.50 per child or 1% of your income. While this is a yearly tax, if you are only uninsured for a portion of the year, the tax is prorated appropriately.

If you are uninsured for less than 3 months at any point in the year, you fall into the ‘short-term gap’ clause and will not be penalized for those months (however you can only use this clause one time in the year). Remember that holding coverage for only one day in any given month is considered coverage for the entire month. So if you enroll in a plan on May 31st, you will be considered covered for all of May.

Want more information about the Obamacare tax for expats?

We have several helpful articles on Obamacare that provide a bit more detail about the tax for expats and how the plan may impact you. Click here to read more!

The IRS tax code is 7,000 pages. Want the cliff notes version for expats? Let us help.
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