NIIT Surtax for US Expat Taxpayers Would End with ACA Reform

With a change in leadership in the US comes a change in policies, some of which directly affect Americans working overseas. Fortunately, one of these changes in particular – related to the Affordable Care Act – would be to the benefit of US expat taxpayers! Here’s what you should know about this important update.

What is the Affordable Care Act?

As you know, the Affordable Care Act (ACA) was enacted under the leadership of former President Obama. It was put into place as a tax provision that was meant to provide affordable healthcare to all Americans, and applied to all US persons (yes, even US expat taxpayers!).

The ACA required that you have health insurance that meets the “minimum essential coverage” requirements, or qualify for an exemption from the requirement in order to avoid paying an “individual shared responsibility payment.” This was essentially a tax you paid based on a per person basis or a percentage of family income, whichever is greater. You can learn more about the current requirements of the ACA on the IRS website.

How Does the ACA Currently Affect Expats?

The ACA has created a slippery slope for the US expat, as most don’t carry US health insurance and many foreign health care plans don’t qualify as “minimum essential coverage.” However, there are certain exemptions that help expats. One in particular relates to the Foreign Earned Income Exclusion (FEIE). If you qualify for the FEIE for your US expat tax, you’re exempt from needing minimum essential coverage. In order to qualify for the FEIE, you must pass one of two residency tests:

  • Physical Presence Test – You must have foreign earned income, a tax home in a foreign country and you must be physically present in a foreign country for at least 330 days out of a 365-day period.
  • Bona Fide Residence Test – You must have foreign earned income, a tax home in a foreign country and you must have been a bona fide resident of a foreign country for an entire calendar year with no intention to return to the US.

Learn more about the FEIE and the two residency tests in this article. Just because you qualify for the FEIE, does not mean that you must take it – you can still be exempt from holding the ACA’s minimum essential coverage so long as you’re qualified for the FEIE. There are also certain foreign health insurance plans that cover expats inside and outside the US, qualifying them as having minimum essential coverage.

ACA Reform on Net Investment Income Tax

The big change coming down the pipeline that directly affects expats is in regards to the repeal of the current 3.8% surtax on net investment income (NIIT). American Citizens Abroad has insisted that this surtax on Americans living and working overseas who were unable to apply for take advantage of the Health Care Exchanges, represents unfair double taxation since foreign tax credits couldn’t be used to offset this on your US Tax Return. This change would take effect in 2018.

Fortunately, due to ACA reform presented by new US leadership, the NIIT issue would no longer be an issue for Americans working and living overseas. This certainly won’t be the only change for US citizens as the ACA reform continues to take shape, so be sure to stay tuned to our blog for the latest expatriate tax news affecting Americans living abroad.

Have More Questions About What ACA Reform Means for Your US Expat Tax?

If you’re not sure how changes to the ACA could affect your expat tax situation, contact us today to be connected with one of our expat-expert accountants. We can help you better understand and prepare for filing your US expat tax return, so you’ll stay compliant with the IRS!

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

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