The Affordable Care Act and Your Expat Tax Return

February 25, 2015

This is the first year that American citizens must report their healthcare coverage and eligibility as part of their US Federal tax return, courtesy of the Affordable Care Act (ACA). The ACA was enacted this year and is a health care initiative designed to ensure that every American has health care coverage. Those who cannot fully afford a health care plan may be eligible for subsidies. But what does this mean for US expats, who don’t even live in the US? Here are the top 4 things you should know as you get ready to prepare your 2014 US Federal Tax Return.

1. Coverage requirements

Under the ACA, you and your family are required to have health insurance that meets the ‘minimum essential coverage’ requirements, as outlined by the plan. If you don’t hold the qualifying coverage, you must qualify for an exemption from the requirement. If neither of these conditions are met, you will be penalized on your Federal Tax Return. This is referred to as an ‘individual shared responsibility payment’. Essentially, this a tax you pay based on either a per person basis or a percentage of family income, whichever is greater.

2. Reporting requirements

While many people have heard of ACA (more popularly known as Obamacare), few knew how they would be required to report their health insurance status on their tax return. The IRS recently sent out some more specific instructions as to how this should be reported.

According to the IRS, “Most taxpayers will simply check a box on their tax return to indicate that each member of their family had qualifying health coverage for the whole year. No further action is required. Qualifying health insurance coverage includes coverage under most, but not all, types of health care coverage plans.”

(If you are unsure if your US health plan qualifies, use the chart on IRS.gov/aca)

Some taxpayers will qualify for or receive advance payments of the premium tax credit and these individuals may see an increase in their tax refund (or a decrease if the income reported to qualify for a health care subsidy was less than originally reported).

If you have a qualifying US health care plan, you will simply ‘check a box’ on your Federal Tax Return and that will be all you are required to do.

3. Exemptions

This is the most important point for expats—are you exempt? For 2014, Americans who qualify as US expats (meaning they pass either the Physical Presence test or the Bona Fide Residence test) are exempt. So if you are eligible to use the Foreign Earned Income Exclusion on your 2014 Federal Tax Return (whether you use it or not), you are exempt from the requirement to have coverage. In addition, expats covered under a US expatriate health plan are also exempt.

If you qualify for an exemption, you will need to complete an additional form (yes, another!)—Form 8965.

4. Penalty Tax

If you are an expat who hasn’t been overseas long enough to qualify as a US expat or you have travelled back to the US enough to negate your ability to pass the Physical Presence test, you may be penalized on your Federal Tax Return. While this may be frustrating, the impact may be minimal. You will incur a penalty for each month you didn’t have coverage. If you held coverage for even one day, this is considered coverage for the month.

For 2014, the tax is as follows:

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.

These penalties rise over the next two years. For more information on how to calculate the payment you may be required to pay, click here.

In Summary

If you qualify as a US expat by one of the residency tests, you will simply need to complete Form 8965 and include it with your Federal Tax Return.  For those who don’t qualify, you will need to calculate your penalty tax and it will become part of your overall tax liability. There is no indication yet that insurance companies will be providing the IRS with data on their covered individuals, so it appears that reporting is currently on the ‘honor system’.  But for most US expats, this is simple: complete Form 8965 and no further action is required.

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