Expat, Meet Obamacare

My wife and I had dinner last night at a small Asian-fusion restaurant here in San Miguel de Allende, Mexico with two lawyer friends visiting from the United States. One sat down and immediately began our evening’s conversation with a story.

“You won’t believe this,” he said, holding up his thumb, grinning ear to ear.

“I was chopping vegetables the other night and I sliced my thumb right here.” I could see the scar.

“I am sorry to hear that,” I offered, “but you seem absolutely cheerful about it.”

He continued. “It bled profusely and we ended up going to the emergency room.” His excitement was palpable.

“And, you won’t believe this, I was seen by a doctor in about two minutes. In the US where I live, I might have sat in the ER for 3 or 4 hours. The doctor sewed me up, told me he wanted to see me again in a couple of days. And then do you know what happened?”

“You discovered a winning lottery ticket in your pocket?” I joked.

“Almost as good,” he laughed. “I got the bill. $35 dollars!”

Having lived in Mexico 10 years, that sounded about right to me.

“Don’t you get it? Thirty-five dollars,” he pronounced the words slowly as If I did not understand him the first time. “In the U.S. that would have been $500, maybe $1000, or more!”

Such is the reaction of many who experience medicine outside the US sickcare system, the most expensive in the world.

THE “CURE” IS WORSE THAN THE DISEASE

And now, with ObamaCare, misnamed the Patient Protection and Affordable Care Act, all Americans, or almost all, are going to have the privilege of paying for that expensive care through the mandatory purchase of insurance which government deems “minimum essential coverage” and if they (you) don’t buy it, you will get hammered with a stiff penalty which the US Supreme Court has decided is actually a tax– a tax on not buying something the government wanted you to purchase.

With no free market or competition built into the system, the American taxpayer is about to be bent over and gang-screwed again. The only difference is that everyone, or almost everyone, is going to get this shaft, including many Americans who live outside the United States.

Let’s begin with the statute itself, Section 1501, which appears to be a collection of English words that have no relation to one another:

Section 1501

‘‘(4) INDIVIDUALS RESIDING OUTSIDE UNITED STATES OR RESIDENTS OF TERRITORIES.– Any applicable individual shall be treated as having minimum essential coverage for any month–

‘‘(A) if such month occurs during any period described in subparagraph (A) or (B) of section 911(d)(1) which is applicable to the individual, or

‘‘(B) if such individual is a bona fide resident of any possession of the United States (as determined under section 937(a)) for such month.

Section 911(d)(1) is part of the Internal Revenue Code and provides:

“(d) Definitions and special rules

For purposes of this section–

(1) Qualified individual

The term “qualified individual” means an individual whose tax home is in a foreign country and who is–

(A) a citizen of the United States and establishes to the satisfaction of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, or

(B) a citizen or resident of the United States and who, during any period of 12 consecutive months, is present in a foreign country or countries during at least 330 full days in such period.”

So, you are probably asking, “What does this mean in English?” At best, it is difficult to explain, but here goes:

Whether the individual mandate to purchase health insurance and the penalties for not purchasing it will depend on whether the expatriate is either:

1) Eligible for the IRS’s foreign earned income exclusion, which means 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

2) spend at least 330 days a year outside the United States.

Still not clear? I thought not. Let’s try again.

If you live outside the US but return to the US more than 35 days in any year, you will be mandated to purchase qualified health insurance coverage or pay the tax unless you can prove you qualify for the foreign earned income exclusion.

The foreign earned income exclusion may be available to you if you meet the bona fide resident test (which means in general terms that you’ve lived in a foreign country for over a year, made it your home, and pay taxes there.) More on this in a minute.

Just know that if you are able to spend less than 35 days a year in the US, your life will be better, or at least easier as far as ObamaCare is concerned. The physical presence test is reasonably simple to calculate– you either spent 330 full days outside the US in a tax year or you didn’t. The calculation is explained by the IRS here.

The problem is that many American expats visit family, friends, and return to do a little business from time to time that keeps them in the US for more than 35 days in a given year, which leaves only the bona fide residence as a way out of ObamaCare, and that test is more difficult. The IRS has an explanation of it here and I hope you find more helpful than I did.

What the IRS does make clear is that the determination of whether you are a bona fide resident of a foreign country will be made based on your answers on IRS Form 2555 which can be found here.

The questions asked on Form 2555 include: whether you buy or rent your residence in the country in which you live, whether you have told the government in the country in which you live that you are not a resident of that country, whether your family lives with you full or part time abroad, and whether you are required to pay income taxes in the country in which you live.

Disturbingly, the effect of your answers to all of these questions is not made clear on Form 2555, except for this bright line test: if you have told the government of the country in which you live that you are not a resident of that country and (for that reason) claim you are not required to pay income tax in that country, welcome to ObamaCare. In such a case, the IRS will deem you having not met the bona fide residence test.

While all expats must wait to see how this plays out, my guess (only a guess at this point) is that you may dodge the ObamaCare bullet if:

1) You live out of the country and don’t return to the U.S. more than 35 days in any year, or

2) You live out of the country, have declared to the country in which you live that you are a “resident” of that country, and you pay income taxes in that country as required by their tax laws which, of course, differ by country. (In Mexico, for example, that would arguably mean holding an FM-2 visa stamped “resident,” or having “immigrant” status, and filing a Mexican income tax return for any income Mexico requires residents to report.)

On the other hand, if you fall into one of the following categories which many U.S. expats will, my guess is you will find the IRS wanting you to pay the ObamaCare tax if you fail to purchase US health insurance that meets minimum government requirements:

1) You live out of the country and spend more than 35 days a year in the U.S. and are not considered a “resident” by the country in which you live and do not pay income taxes in that country as required of residents, or

2) You live out of the country pursuant to a non-resident visa, e.g., an FM-3 “non-resident” visa in Mexico, and you do not pay income tax in the country where you live because you are not, or claim not to be, a resident there.

Of course, I could be wrong. It remains early in the game. The individual mandate of ObamaCare does not take effect until January 1, 2014, which is also when the tax for failing to have mandated insurance goes into effect. That tax includes an annual penalty of $95, or up to 1% of income, whichever is greater, on individuals who are not covered by an acceptable insurance policy; this will rise to a minimum of $695 ($2,085 for families), or 2.5% of income, by 2016. (Any US citizen who lives outside the US should consult with their tax attorney or tax advisor to determine whether they must buy US health insurance or pay the tax.)

What I do know is that ObamaCare is an in-your-face Statist move, funding 16,000+ new IRS agents to make sure everyone complies or else, and that it will be another reason many US citizens living abroad will seriously consider expatriation. One other avoidance technique I failed to mention is to get yourself tossed into a US prison, easy to get done these days. Seems prisoners are provided healthcare and won’t be required to duplicate the coverage they already have. As you can see, some US expats won’t be so lucky.

Many other questions remain, to include whether cross-border or international health insurance policies which many expats purchase meet minimum government requirements. And, if an expat is required to purchase insurance, will they receive tax credits to subsidize their purchase of insurance available to some of their onshore brethren? Other topics for other times.

Now, take a deep breath. Remove the pistol from your mouth. Check your blood pressure and before writing hate mail, remember that I did not write this law, but rather, that I am just a humble decipherer of the Klingon.

Go in peace, or flee. Your choice.

Regards,

Jim Karger