The US Patient Protection and Affordable Care Act (PPACA) or so-called "Obamacare" was upheld by the Supreme Court in June 2012. Starting January 1, 2014 U.S. citizens will be required to carry affordable healthcare coverage or pay a penalty tax. The annual penalty tax will be $95 on individuals who do not have an acceptable insurance coverage. The penalty tax is scheduled to increase to $695 by 2016.
So, how does it affect American expatriates living abroad?
At Artio Partners we come across two key questions from our clients. Will an American living abroad be able to purchase this healthcare coverage? Also, will an American expat be required to pay a penalty tax?
The answer to both questions is "no" for now.
For now American expats living abroad are ineligible to buy healthcare coverage through any individual plan under the PPACA because the PPACA is focused on domestic insurance plans and is available only to residents of the U.S. states. One note is important to mention in this regard. One of the provisions of Obamacare fully prohibits insurers from discriminating against individual adults with pre-existing conditions. Since Americans living abroad with pre-existing or chronic health conditions are left out of the opportunity to buy such a coverage under the PPACA, they should review their current health policy and follow future law developments in regards to this issue.
The PPACA exempts American expats living abroad from the penalty tax. Americans living abroad who qualify for the Foreign Earned Income Exclusion are considered to have the required amount of health insurance. If an American expat doesn’t have a health insurance but qualifies for the foreign earned income exclusion, s/he is still exempt from the penalty tax. The IRS will definitely pay more attention to a US expat tax return in the future to identify people who wrongfully claimed the FEIE.
Although American expats are exempt from the penalty tax, starting in 2013 some high-income earners will have to pay an additional 3.8% tax on net investment income (including capital gains, dividends, interest, royalties, rents, and annuities). The following categories of American expats will be subject to this tax:
- 1. Single filer with AGI (adjusted gross income) over $200,000
- 2. Married filing jointly with AGI over $250,000
- 3. Married filing separately with AGI over $125,000
Additionally, if an American living abroad belongs to one of the above categories and pays Medicare payroll taxes, s/he may be subject to an additional Medicare 0.9% tax on wages and self-employment income. However, since the US has a totalization agreement with 24 countries that prevents a dual Social Security coverage, American expats living abroad might be relieved from paying an additional 0.9% Medicare tax.
It is important for American expats living abroad to follow future developments and consult an expat CPA to discuss your individual situation.