Top Four Facts: The ACA and Your Expat Tax Return

A topic that has been at the forefront of media outlets for a number of years now, the Affordable Care Act (ACA) remains a buzzword and is still proving to be a bit cumbersome for some individuals. As an American living abroad, you’re probably well aware of your US expat tax return requirements, but what may be less obvious is how the ACA, otherwise known as “Obamacare,” affects you while living overseas. Read on for the facts you should know.

Fact #1: You aren’t exempt just because you don’t live in the US.

It’s understandable to think you’d automatically be exempt, since you are not physically in the States. And, good news: most US expats are, in fact, exempt from the ACA. For an exemption, you must do one of the following:

  • Pass the Physical Presence Test – You must by physically present in a foreign country for 330 out of a 365-day period.
  • Pass the Bona Fide Residence Test – You must have been a bona fide resident of a foreign country for an entire tax year (usually calendar year).
  • Hold a qualifying US expat health care plan

Those who do not meet one of the above requirements will be subject to the individual shared responsibility provision, which requires you to either have minimum essential coverage (through an employer, the Marketplace or a state-run insurance purchasing site), qualify for a coverage exemption or make an individual shared responsibility payment when you file your US expat tax return.

Fact #2: If you do qualify for an exemption, it’s easy to claim.

The thing to know about being exempt from Obamacare is that you’ll need to claim your exemption using Form 8965. Fortunately, it’s an easy form to complete and the only thing that will be required of you. Visit the IRS website to learn more about Form 8965 and how to complete the form to submit with your expat tax return.

Fact #3: Some expats must pay a penalty tax.

The unfortunate truth is that some US expats may not qualify for an exemption if they can’t meet one of the qualifications listed in Fact #1. If you aren’t overseas long enough to qualify, or if you don’t have a qualifying US expat health care plan, you will be required to comply with the provisions of the ACA, which means you will be subject to a penalty tax. For the 2016 tax year, you’ll be required to pay the greater of:

  • 2% of income above filing threshold (the minimum amount of gross income an individual of your age and with your filing status must make to be required to file an expat tax return)
  • Your family’s flat dollar amount, which is $695 per adult and $347.50 per child, with a family maximum of $2,085

The amount of penalty tax you pay is capped at the cost of the national average premium for a bronze-level health plan on the Healthcare Marketplace.

If you find that you’re facing a significant penalty but know that you’ll qualify for the Foreign Earned Income Exclusion (and thus will meet the Physical Presence Test or Bona Fide Residence Test), you can always file an extension for your expat tax return to avoid the penalty. Filing the extension may also reduce your overall tax liability, since the FEIE is a way many expats offset their US taxes.

To learn more about the FEIE and other ways to save on your US expat tax return, check out our tax guide for Americans working overseas.

Fact #4: You can have a short gap in coverage each year without penalty.

A lesser-known fact about the ACA is that you are granted a short-term coverage gap of less than 3 months each year (meaning you are exempt for two full months, but will need coverage for at least a day in the third month).

Also, returning to the US from another country is considered a qualifying event, which means you have 60 days to enroll in a health care plan through the Marketplace, even if it’s outside of the open enrollment period. The Marketplace is a place where you can find reduced-rate coverage based on your gross income.

If, for some reason, you cannot afford health care coverage on the Marketplace, you may qualify for a credit that helps offset the premium, called the Premium Tax Credit. It is based on your income and family size, and can be paid directly to your healthcare provider or as a refundable credit on your expat tax return.

Still Have Questions About the Affordable Care Act and How It Affects US Expats?

Our team of dedicated CPAs and IRS Enrolled Agents will be happy to assist you with all of your ACA questions and expat tax needs – contact us today!

Free Guide: The 25 Things Every Expat Needs to Know About Taxes

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