What Your Expat Clients Should Know About ACA and Tax Reform

With the passage of the Affordable Care Act (ACA), individuals are given “shared responsibility” to improve the quality of health care coverage in the United States. Beginning in 2014, individuals must have qualifying health care coverage for each month, qualify for an exemption or make a payment when filing their federal income tax return.

The language used to define who has this shared responsibility is very broad, and applies the responsibility to all U.S. citizens living in the states, as well as all permanent residents and foreign nationals who are in the United States long enough during a calendar year to qualify as resident aliens for tax purposes. This includes nonresident aliens electing to be treated as resident aliens.

Individuals not lawfully present in the states and who are not U.S. citizens or U.S. nationals are exempt from the shared responsibility requirement. An immigrant with Deferred Action for Childhood Arrivals (DACA) is also eligible for this exemption from the shared responsibility requirement. Individuals filing Form 1040NR or 1040NR-EZ do not need to take any action to claim an exemption from the individual shared responsibility provision. Most other individuals claiming an exemption have to attach Form 8965, Health Coverage Exemptions.

When a taxpayer lives abroad – known more commonly as an expat – they are still responsible for filing a U.S. tax return. To help alleviate the burden of double taxation, taxpayers are allowed to exclude $103,900 (2018 amount) of earned income from U.S. taxes if certain tests are met. If the taxpayer is physically present for 330 days during any period of 12 consecutive months or is a bona-fide resident of a foreign country for the entire tax year, they qualify for this foreign earned income exclusion on Form 2555, Foreign Earned Income, or Form 2555-EZ, Foreign Earned Income Exclusion.

The shared responsibility requirements also apply to expats, but the ACA allows taxpayers living abroad an exemption from the requirement by using qualifying rules that closely mirror the foreign earned income exclusion. Generally speaking, if a taxpayer can file Form 2555 and exclude part of their earned income, they are exempt from the shared responsibility requirement of the ACA. U.S. citizens who meet neither the physical presence nor residency requirements may be subject to the shared responsibility requirements of the ACA.

It is important to keep in mind that while the rules for qualifying for the foreign earned income exclusion and an exemption from the ACA shared responsibility are very similar, they are not identical. For example, employees of the U.S. Government generally do not qualify for the foreign earned income exclusion on Form 2555, but they can still be exempt from the shared responsibility under the ACA.

If the overseas taxpayer does not meet the physical presence or bona-fide residence test for the purposes of exempting themselves from shared responsibility, then Form 8965 instructions should be reviewed closely to see if the taxpayer meets the requirements for another exemption. One exemption that may be of particular interest to an overseas taxpayer is the short coverage gap. If the taxpayer is without coverage less than three consecutive months during the year, they qualify for this exemption. This may apply to taxpayers who are overseas on short assignments. If a taxpayer is overseas for religious reasons and they participate in a health care sharing ministry, such as Medi-Share, they qualify for an exemption.

Editor’s note: This article was updated on Jan. 11 to reflect the updated amount of $103,900 on the 2018 Form 2555.