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In late June, the Supreme Court upheld most of the provisions of what has been called Obamacare, otherwise known as the US Patient Protection and Affordable Care Act (PPACA). One of the most controversial items in the PPACA states that US citizens must either carry healthcare coverage or pay a penalty in the form of a tax starting in 2014. The amount of the tax is scheduled to rise to $695 per year by 2016. But the question remains: will this be applied to Americans who pay expatriate taxes?
Creveling and Creveling contacted lawmakers and underwriters to ask just this question, and reports that for the most part, expatriate taxes will not be impacted by the PPACA. Instead, the law is state-focused and refers to domestic insurance plans, so is therefore available only to residents of US states. Taxpayers living overseas who have been worried about being forced to purchase specific forms of health insurance will be relieved. However, this may be discouraging to expats who have difficulties finding affordable coverage due to pre-existing or chronic health conditions.
Americans living overseas will be relieved to know that the PPACA mandate – and therefore the penalty tax – does not include expats. For the purposes of Obamacare, if you are qualified to claim the Foreign Earned Income Exclusion, you will be assumed to have the required amount of health insurance and will therefore be exempt from being assessed penalties on your expatriate taxes. This is true even if you do not have any health insurance at all. But this does mean that if you do not qualify for the Foreign Earned Income Exclusion, you may be required to purchase PPACA-approved health insurance coverage or face a penalty.
One point to remember is that, starting in 2013, there may be an impact on your expatriate taxes if your income exceeds certain levels. Those are $200,000 for a single filer, $250,000 for married filing jointly, or $125,000 for married filing separately. For high-earning expats, you will be required to pay an extra 3.8% tax on passive income such as capital gains, interest, rents, and so on. If you pay Medicare payroll taxes, you will have to contribute an extra 0.9% on income earned above those thresholds.
If you have questions about your expatriate taxes, we have an in-depth piece about the Foreign Earned Income Exclusion. If you have other questions or would like to learn about our expat tax services, please contact us.
Use our simple excel calculator to get an estimate of how the foreign earned income exclusion will save you money. It will make your day!