Expatriates may be exempt from paying an Obamacare fine based their residency status or the amount of time they have spent out of the country.
The same IRS rules which make possible a federal income tax exemption can also be used to determine an Affordable Care Act penalty exemption for expats.
No ACA fine is possible, regardless of where you live, if your income is low enough whereby you do not need to file a tax return.
Regular Obamacare exemptions are also available to expats and it’s important to familiarize yourself with them to avoid a penalty.
Form 2555 & Obamacare
IRS Form 2555 can be used by American expats to determine both their federal tax liability and an Obamacare fine, if any. This tax form is an accounting of your foreign earned income, your time spent overseas as well as your residency classification. Those are the factors that will determine if you, as an expat, qualify for an Affordable Care Act penalty exemption.
Bona Fide Residents
Do you reside as a permanent resident of a foreign country or foreign territory? If so, you could meet the IRS’s Bona Fide Resident test requirement. This would allow you to claim an exemption from the Obamacare fine regardless of your income or any other circumstances.
The 330-Day Rule
There is another option if you are not actually considered a permanent resident of a foreign land. Being overseas for a long enough time period can help you to avoid an Obamacare penalty.
The IRS’s Physical Presence Test, also on Form-2555, can form the basis for determining an Obamacare fine exemption for expats. You can use this method if you aren’t in the United States for 330 or more days during any 365 day period.
Uncertainty for Expats
Implementation of Obamacare and particularly how the health insurance mandate affects expatriates is, unfortunately, not entirely clear. It’s understandable that expats may feel confused about staying in compliance or avoiding the penalty. The rules do not fully explain how the law applies in certain situations.
Further complicating matters is the fact that purchasing a special health insurance plan, one that can be used in a foreign country, may not qualify for what’s considered Minimum Essential Coverage under the ACA’s Individual Mandate.
Specific Grey Areas
We think there are grey areas which need clarification. While the Foreign Income Exclusion rules are clear in regards to how income is taxed, that is not really the case when it comes to Obamacare and how the penalty applies.
One example would be how overlapping or partial years are handled. It would appear that expats who left the country in June, for example, would need to maintain Minimum Essential Coverage for that same year even if they were no longer planning to live in the United States.
This means it’s possible that dropping health insurance coverage midyear could subject you to an Obamacare fine. Honestly, we are unsure! In any case, that seems unfair to expats.