Saturday, November 21, 2009

Senate Health Care Bill: Expats Exempt From Coverage Mandate, But Some Would Have To Pay Higher Medicare Taxes

Sherman Oaks, California

The current draft of the U.S. Senate’s health care reform bill is 2,074 pages long. I have not yet read the whole thing, but I’ve tried to identify the provisions which would affect U.S. citizens who live abroad.

Here’s what you should know:

1. Formalities. The bill is titled the Patient Protection and Affordable Care Act, and it’s sponsored by Senate majority leader Harry Reid. The bill is currently numbered H.R. 3590. (Why does a Senate bill carry a House of Representatives number? Presumably because all bills which raise taxes or spend money must formally originate in the lower house, as per Article 1, Section 7 of the Constitution.)

2. Coverage Mandate. All “applicable individuals” are required to be covered by health insurance. H.R. 3590, Section 1501(b) (proposing new Internal Revenue Code section 5000A(a)).

3. Fines and taxes. If you are an “applicable individual” and you are not covered by health insurance, a fine of about $63 a month can be imposed. H.R. 3590, Section 1501(b) (proposing new Internal Revenue Code section 5000A(c)). Since this would be an I.R.S. fine, failure to pay the fine could expose the person to the I.R.S.’s many civil penalties. See Letter from Joint Committee on Taxation dated Nov. 5, 2009. Criminal penalties could not, however, be imposed for failure to pay the penalty. H.R. 3590, Section 1501(b) (proposing new Internal Revenue Code section 5000A(g)(2)(A)).

4. Expats exempt. As with the House bill, people who reside outside of the United States for at least 330 days in a 12-month period “shall be treated as having minimum essential coverage” for each of those 12 months. H.R. 3590, Section 1501(b) (proposing new Internal Revenue Code section 5000A(f)(4)).

5. Higher-income expats have to pay ½% more. U.S. taxpayers earning more than $200,000 individually or $250,000 jointly will have to pay an additional one-half of one percent of their income as Medicare taxes. H.R. 3590, Section 9015(a), (b) (proposing new Internal Revenue Code section 3101(b)). Consequently, the Medicare tax for these higher-income expats will increase from 2.9% to 3.4%. Medicare tax must be paid by U.S. citizens regardless of where they reside. And there is no cap on Medicare tax, so expats have to pay it on all wage income.

6. New plastic surgery tax may increase medical tourism. The bill seeks to impose a 5% tax on elective plastic surgery, to be paid by the patient and to be collected and remitted by the doctor. H.R. 3590, Section 9017 (proposing new Internal Revenue Code section 5000B). This adds another weapon to the marketing arsenals of non-U.S. hospitals seeking to attract medical tourists.

7. Effective Dates. The plastic surgery tax would start in six weeks – on January 1, 2010. H.R. 3590, Section 9017(c). The higher Medicare tax would kick in January 1, 2013. H.R. 3590, Section 9015(c). The coverage mandates and fines for non-coverage would begin January 1, 2014. H.R. 3590, Section 1501(c).

In sum: Expats earning healthy salaries would see a tax increase under the Senate plan, although they would not be mandated to obtain qualifying health insurance coverage.



Blogger Jungle Jil said...

Thanks for the information. I was asking this same question over at my blog and one of my readers provided me a link to this article. I've now linked to it.

10:08 AM  
Blogger Maha said...

Thank you for the great information.

Do you have any idea how this mandate would work for Expats that live between 2 countries (half and half). Would the foreign based international insurance be good enough or would we be required to take additional year around US based health insurance (which is useless abroad)?

11:54 PM  
Anonymous Anonymous said...

Could you tell me 1) how are the IRS people going to know if an expat is outside the US for a minimum 330 days? 2) What about citizens whose income is low and who can't afford insurance? Will they qualify for some sort of subsidy?

8:51 AM  
Anonymous maxman71 said...

In response to anonymous' 2 questions:
1) If the IRS challenges your tax return that states you qualify for non-resident status basis the "Physical Presence Test" of being out of the US at least 330 calendar days a year, they can request copies of your passport pages to prove your claim. If they catch you in a fib, paying for back health insurance premiums will be the least of your worries.

2) Don't know the answer for sure, but I would doubt the subsidies available to low-income US citizens living in the US would apply to those overseas. But I could be wrong.

1:17 PM  
Blogger maxman71 said...

In response to Anonymous' two questions:
1) The IRS can challenge your claim of non-resident status on your tax return by demanding to see copies of your passport pages. If your exit and entry stamps between the US and other countries don't support your claim to being outside the US at least 330 calendar days a year, not paying the required health insurance premiums will be the least of your concerns.
2) Not sure about this one.

1:23 PM  
Anonymous maxman71 said...

Does anyone know if the latest Health Care Bill being voted on Sunday March 21 in the House still exempts expats if they meet the 330days out of the US? I downloaded what I think is the latest version of HR 3590 and looked up section 1501(b) and could not find any such exemption for expats. Thanks.

6:20 PM  
Anonymous Jamie said...

Not entirely accurate regarding Medicare tax. From the IRS:

When Social Security and Medicare Taxes Apply Outside Of U.S.
In general, U.S. social security and Medicare taxes continue to apply to wages for services you perform as an employee outside of the United States if one of the following applies:

You are working for an American employer which includes:
The U.S. Government or any of its instrumentalities
An individual who is a resident of the United States
A partnership of which at least two-thirds of the partners are U.S. residents
A trust of which all the trustees are U.S. residents
A corporation organized under the laws of the United States, any U.S. state, or the District of Columbia, Puerto Rico, the Virgin Islands, Guam, American Samoa, or the Commonwealth of the Northern Mariana Islands (with respect to the CNMI, refer to Revenue Ruling 80-167).
You perform the services on or in connection with an American vessel or aircraft and either:
You entered into your employment contract within the United States, or
The vessel or aircraft touches at a U.S. port while you are employed on it
You are working in one of the countries with which the United States has entered into a binational social security agreement (also known as Totalization Agreements), and the agreement provides that your foreign employment is subject to U.S. social security and Medicare taxes.
You are working for a foreign affiliate of an American employer under a voluntary agreement entered into between the American employer and the U.S. Treasury Department

12:33 PM  
Blogger maxman71 said...

Hello Jamie--

Thanks for the response and info. Yes, I am fully aware of requirements to pay into FICA and Medicare while working overseas; been reporting and paying such taxes for years now. What I was focusing on was the exemption from having to pay for med insurance as required by the just passed Health Care Bill.

As for that question, after my post I dug back in the latest version of the Bill I could find online and indeed, the exemption for expats who meet the 330 day rule remained intact. The only remaining question is, is this exemption in the Bill the House actually passed. You never know with these characters in Congress; a slippery bunch they which is about the nicest thing I can say about them...

6:22 PM  
Anonymous Anonymous said...

Good luck figuring this thing out. We were told this would be transparent. Everything has been a matter of back room deals and bribes. This was not the only health care bill which was possible. The majority of US citizens are against THIS bill. Many organizations endorsed the bill before it was even available to read!

7:14 PM  
Blogger el jubilado said...

Sorry to say they no longer stamp passports. I got stamped in by Mexico but not out in 2009. This year nothing

10:42 PM  

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