In his campaign and once in office, President Obama promised to provide affordable healthcare to all Americans. As the “stick” part of his carrot and stick approach, he argued that a tax be imposed on all Americans who do not have adequate health insurance and choose not to buy health insurance through one of the new insurance schemes.
It is important to note that the tax applied to all Americans and the health insurance provided under the new schemes covers only healthcare delivered in the US.
This led to two problems facing all Americans living outside the country who do not have US-based health insurance:
1. Most such Americans already have decent health insurance provided by the country in which they live (Europe, Canada, Australia, New Zealand, Japan and others). So it is unfair to require them to buy insurance that they do not need and, unless they move back to the US, cannot use.
2. Americans living in most parts of the developing world do not have (local) government-provided healthcare and there is nothing in any bill that was proposed that would pay for medical expenses incurred outside the US.
Nothing in the bill that passed does anything to help the folks who live in the developing world and are otherwise uninsured.
PENALTIES FOR NOT PURCHASING HEALTH INSURANCE
Both the House and Senate bills contained penalties for non-enrollment. This was the most confusing part of the legislation. Originally, the House penalties were much higher than those passed by the Senate. As explained above, the House passed the Senate bill and then raised the penalties in reconciliation. Here are the “reconciled” terms:
Individuals who can afford to purchase health insurance coverage and do not do so will face a penalty (tax) of the greater of
* $95 or one percent of income in 2014;
* $325 or two percent of income in 2015; and
* $695 or 2.5 percent of income in 2016,;
* Families will pay half the amount for children up to a cap of $2,250 for the entire family.
* After 2016, dollar amounts will increase by the annual cost of living adjustment.
In 2016 the 2.5% will apply to a maximum income of $90,000 and this is where the number $2,250 comes from (2.5% of $90,000 is $2,250.)
Note: These “penalties” are included into the bill as amendments to the Internal Revenue Code of 1986 so, whether they are called fines, penalties or whatever, they are treated as taxes.
HOW DOES THIS AFFECT AMERICANS LIVING OUTSIDE THE US?
Americans living outside the US are exempt! Here is the language in the final bill.
“(4) INDIVIDUALS RESIDING OUTSIDE UNITED STATES …
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….”
What does this mean?
First, remember that this is a tax. In order to impose a new tax, it is necessary to amend the tax code. Section 911 of the tax code gives certain tax deductions and credits for Americans living overseas. The best-known such is an annual deduction for foreign earned income.
If the IRS is to give a deduction to someone living overseas, they have to define what it means to “live overseas.” Here’s the IRS definition of a “qualified individual”-that is, someone who can take the deduction.
(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.
If you want to see more, you can find Section 911 of the tax code here: www.law.cornell.edu/uscode/26/usc_sec_26_00000911—-000-.html
Two important notes:
1. This exemption applies to anyone who qualifies for the 911 deduction. It does not mean that someone who qualifies has to take the deduction. For example, an American student who grew up and now studies in France would be exempt from the “non-enrollment” tax even though she doesn’t earn anything and, therefore, doesn’t need a deduction.
2. The exemption does not prevent anyone from buying health insurance in the US. All it says is that if you live overseas, you don’t have to buy it. That is, you can elect to buy into the new system but you won’t be penalized if you don’t.