Expats and Obamacare for los Idiotas

“Everyone should have health insurance? I say everyone should have health care. I’m not selling insurance.” ― Dennis Kucinich

A blogging friend from Ecuador recently wrote a post asking many questions about expats and Obamacare.  The second phase of the Affordable Health Care Act will start on January 1, 2014 requiring all USA citizens to buy health insurance. But, how will this effect expats living abroad?

Did you ever try to decipher the IRS tax code? The statute states that there’s an exemption for USA citizens living overseas tied to Section 911. The Secretary of Health and Human Services cannot override it, though the Treasury Department can issue regulations interpreting it.

“Any applicable individual shall be treated as having minimum essential coverage for any month . . . if such month occurs during any period described in subparagraph (A) or ( B ) of section 911(d)(1) which is applicable to the individual.” IRC Sec. 5000A(f)(4)(A).

HUH???  Or this….

“The term “tax home” means, with respect to any individual, such individual’s home for purposes of section 162 (a)(2) (relating to traveling expenses while away from home). An individual shall not be treated as having a tax home in a foreign country for any period for which his abode is within the United States.”

So, for expats, like us, I have written an idiot’s guide ( mainly for me..a dummy when it comes to legal terms) for expats and Obamacare. Of course, it’s all based on my interpretation of the law, which really means..it’s a jungle of legal jargon in section 911 open to anyone’s interpretation.

Who has to buy the mandated insurance?

In the new Internal Revenue Service (IRS) tax code, expats are treated as if they have health insurance regardless of whether they do or not. So, it looks like expats don’t have to buy insurance or pay a penalty for not purchasing insurance.  But there’s a catch…there’s always a catch.

What is the IRS foreign earned income exclusion?

How does the IRS decide if USA expats (I refuse to use the word “American’ because everyone living in North or South America is an American) are exempt from the insurance mandate? Enter the IRS’ definition for foreign earned income exclusion.

In order for USA expats to be exempt from the insurance mandate, they must already be eligible for the IRS’ foreign earned income exclusion. Now, I know why we were asked 4 questions on our income tax return about how long we have lived abroad ( I’ll come back to this later, because it is a touchy subject for some expats).

In order to meet the criteria for the exclusion that allows U.S. expats to avoid paying U.S. taxes on their first U.S. $91,500 worth of income, the expatriate must have a tax home (the general area of your main place of business or employment where you happen to be permanently or indefinitely engaged) in a foreign country, as well as be either a legitimate resident in that country, or spend at least 330 days a year outside the United States.

Since we are legal residents of Nicaragua and spend at least 330 days a year outside of the USA, we are eligible for the IRS’ foreign earned income exclusion. If we are asked to prove it, we can simply scan a copy of our residency ID cards and send the IRS a fax.

What is a tax home?

When it comes to the tax penalty for not having health insurance, the legislation borrowed the test from the Section 911 Earned Income Exclusion: tax home overseas, plus either 330 out of 365 days overseas presence or legal foreign residency. Thus, if one qualifies for the earned income exclusion one doesn’t have to worry about having U.S. health insurance.  “Tax home” is a concept that applies awkwardly to retirees, since it’s a requirement intended for those who are working and earning income.

Because we are retired, we may have to use our Nicaraguan address on our income tax forms. That should be a good for a couple of laughs: 300 meters south of Puesta del Sol, on the beach in La Paloma, across from where the giant Ceiba tree fell down 3 years ago, but is no longer visible, 2 kilometers from the port town of Moyogalpa, on the island of Ometepe, in Nicaragua.

What about Medicare? Does that count for insurance?

For USA expats 65 and over, Medicare qualifies as required insurance coverage. Although, medicare coverage can ONLY be used within the U.S. boundaries. It cannot be used abroad.   Retired U.S. Military have TRICARE which qualifies as the required insurance coverage. Other retired expats may have insurance plans included in their retirement plans that qualify. They are insured. The law goes after the uninsured residing in the USA.

Problems expats may encounter

1. What if I don’t want the U.S. government to know I’m living abroad?
From my understanding of the law and in filing an income tax return, you will be faced with a difficult decision. Either you tell the IRS you are living abroad for at least 330 days,  pay the $95 penalty (which will increase every year), or don’t file an income tax return.
I’m not aware of any other choices.

2. What if I live abroad less than 330 days?
This is a problem, and I’m not sure what the IRS will do about this. If you split your time abroad and in the states, you will either have to buy health insurance or pay the penalty. The problem is that health insurers will continue to offer insurance only to residents of a particular state, since rates will vary geographically. If you’re not a resident of a U.S. state within the meaning of an insurance policy, you’re not going to be able to get insurance. And if you do claim residency on a questionable basis, the insurer can deny your claims. There is no meshing between the tax penalty and the insurance policy requirements. It’s impossible to get health insurance for a 2 or 3 month visit back to the states.

If there’s any message in the health care act — and in the legislative process that produced the act — it’s that the insurance companies are in control.

Now more than ever.

Other resources:

1. Nancy’s blog post that started me on my quest. Obamacare and the Expat

2. U.S. Tax Code, section 911 document

3. Obamacare and Americans Living Abroad