PPACA Compliance and Shared Responsibility for American Expats

Ed note: American expats may not be giving the Affordable Care Act a second thought, but don’t be so quick to dismiss it. If you don’t meet one of several requirements, you may still face a penalty on this – or future – tax returns.

With the tax season now in full swing, many expats living abroad have begun to wonder whether the Patient Protection and Affordable Care Act’s (PPACA) Individual Mandate will complicate their taxes, or worse, increase them.

Starting in 2014, the Individual Mandate requires U.S. citizens and tax residents to retain minimum health coverage. Those that don’t have this coverage for three or more months are subject to a tax penalty called a “shared responsibility payment.” For your 2014 tax return, the maximum monthly penalty is $285. However, the maximum will increase substantially in 2015 and 2016, to $975 and $2,085, respectively.

With that in mind, it is important that expats understand how the Individual Mandate applies to your taxes, if you live abroad.

Fortunately, many expats will be exempt from the requirement to maintain minimum coverage for any month during which any of the following is true:

• The expat is a bona fide resident of a U.S. possession (Guam, American Samoa, the Northern Mariana Islands, Puerto Rico, or the Virgin Islands)
• The expat satisfies the bona fide residence test
• The expat is physically present outside of the U.S. for 330 days during a one-year period

If you currently satisfy one or more of these conditions, the only thing you need to worry about is claiming your exemption and getting minimum coverage within three months of moving back to the U.S. However, avoiding this penalty is more complicated if you’re moving abroad, because the penalty is computed on a monthly basis while the exemption takes a whole year.

During your first year abroad, there may be several months where it’s unclear whether you meet the requirements of the bona fide residence. It also may be difficult to know if you will meet the 330 day requirement if you travel back to the U.S. on business or over the holidays. Understanding when you satisfy these tests is essential to avoiding a nasty surprise at tax time.

Determining exactly when you will satisfy the requirements of the Individual Mandate exemption may require you to carefully analyze your individual facts and circumstances, as well as the time you spent both in the U.S. and abroad. While making this determination can be difficult, especially prospectively, our expat tax advisers have the expertise to ensure that you don’t pay any more than is necessary. Set up a free consultation with one of our advisers at H&R Block Expat Tax Services and see for yourself!