New Healthcare Requirement, Tax Penalties and Exceptions


Tax (Photo credit: 401(K) 2013)


In 2009, the new HealthCare law was passed (Obamacare) and more recently the law and the tax penalties were upheld by the U.S. Supreme Court. All U.S. citizens and residents, starting Jan 1, 2014, will be required to have qualifying health care. Many people will satisfy this requirement with Medicare, Medicaid, and employer paid or sponsored coverage.



Others without one of these types of health insurance plans will be required to purchase their own health care insurance, unless they qualify for an exemption. The health care tax penalty, which will be reported on tax returns filed in 2015 for the tax year 2014, may be avoided if the citizen or resident qualifies for an exemption.  Persons who are incarcerated, persons who are Native Americans and covered under the Indian Health Care Service, and persons who belong to a religious organization that shares health care costs within their organization (i.e., Amish, and must satisfy specific requirements) may be able to avoid the penalty by not being subject to the law.



A special rule applies to U.S. citizens and residents who reside outside of the U.S. and may allow these taxpayers to avoid the penalty. These individuals are subject to the mandate as citizens, but are deemed to be in compliance with it as foreign residents, if the residency requirements are met. The special rule applies only to taxpayers who meet the requirements to exclude foreign earned income (the bona fide presence test or the physical presence test of foreign residence of at least 330 days – continuous or non continuous – in any 365 day continuous period – where the 365 day period may overlap tax years and may not be entirely made up of days in the reporting tax year) or who are bona fide residents of a U. S. possession. Note that the individual need not actually exclude any foreign earned income on an IRS form 2555 but must qualify to do so in order to avoid the penalty.



Also, some individuals would not pay a penalty for not having qualifying health insurance even though they are subject to the mandate. For instance, an individual whose income is below the filing threshold for his filing status (having no tax liability for the year) would still be subject to the mandate. However, the individual would not pay a penalty due to not having qualifying insurance because of low income levels.



As I see it, the keys for U.S. citizens living abroad to avoid the Health Care tax penalty are either: stay away from the U.S. for a minimum of 330 days during any 365 day period, OR make sure that you have no taxable income in the tax reporting year.



Remember:The IRS will not impose any penalties against a taxpayer if the taxpayer owes no tax to the IRS and neglects to file in any given tax year. Penalties and interest are only imposed when a taxpayer either underestimates tax owed, OR neglects to file and the IRS determines that the taxpayer does, in fact, owe tax.



The IRS can and often does overestimate tax liability at any time, even many years after a tax year, which may force a taxpayer to file a prior year tax return, depending on the tax situation, in order to prove or disprove tax liability to the IRS. The IRS also does not look benevolently at taxpayers who file tax returns sporadically, even if your income is sporadic. If you don’t believe you owe any tax, it’s still a good rule of thumb to always file your return just to document your tax status every year with the IRS.




However, a taxpayer can only file no more than 3 years after the tax filing deadline for a given year in order to request a refund of tax from the IRS. After that 3 year date goes by, you cannot request any refunds, even if you were entitled to them.



Meaning: file your taxes every year, no later than the filing deadline (usually April 15) in order to avoid those dreaded nastygrams (CP2000 tax owed IRS notice letters) sent out by the Internal Revenue Service requesting either that you file or that you pay tax that may or may not, in actuality, owe.



3 responses to “New Healthcare Requirement, Tax Penalties and Exceptions

  1. Very useful and timely info. TurboTax will guide you through the requirements. Any day in which you are in (or flying over) the US for even a minute will count as a day in the US. Humbug! Use dates on passport stamp. Thanks. Gary, in Cuenca

    • I don’t think that it would count if you flew OVER the USA….but as you say, if you use your passport stamp, that should verify. The difficult part to understand is that the 365 day period is not required to be entirely during the tax year, it can overlap the previous year OR the current year; the taxpayer can also re-use days in subsequent years in order to state the 365 days. I.e.: tax year 2011, taxpayer was in the U.S. from 2-1-2011 until 1-31-2012. Next year, tax year 2012, taxpayer can use the dates of 10-1-2011 thru 9-30-2012 as the 365 days. I don’t think most taxpayers understand this, many of my clients don’t.

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