September 29, 2013

Ho-ho—Oh.

I was a sociology undergrad and — as clearly evidenced by my ongoing comic strip about Karl Marx — I'm still kind of a sociology nerd. I love seeing the social phenomena I studied all those years ago continue to play out in real life. And now (as then) one of the phenomena that always tickles me the most is unintended consequences. You know, you pass a law intended to do one good thing, which it usually does to a greater or lesser extent, but at the same time it ends up causing all these other problems that nobody ever predicted.

Well, today observer has become the observee.

Regular readers will know I hate the American healthcare system and am super-pro-Obamacare, as well as super-pro government-run healthcare, free healthcare, death panels, etc. So I'm glad Obamacare is finally chugging to life this week. But today I was thinking about its core component, the "Individual Shared Responsibility Provision," or "the mandate," or the requirement that everyone purchase health insurance or face a fine — and I realised: oh fuck.

Not because I don't have health insurance or wouldn't pay for it if I didn't — but because eventually I plan to move back to the U.K. (partly for the free healthcare, ahem). And according to the IRS, U.S. citizens living abroad are still subject to the mandate — meaning they're still subject to a fine if they don't have coverage that qualifies under the Affordable Care Act. And in July, HHS went on the record saying that
foreign health coverage is not designated as minimum essential coverage in this final rule.
In other words: if you're a U.S. citizen living in another country and fully covered in another country (free healthcare, ahem), you are still, in theory, subject to a penalty for not having coverage.

Now, you might be thinking: WTF? Why would you be subject to the penalty if you're no longer taking part in the incredibly ballsed-up American healthcare system that the mandate is designed to kind-of repair? Well, actually, you are and you aren't. Here's the official guidance from the IRS:
12. Are US citizens living abroad subject to the individual shared responsibility provision?

Yes. However, U.S. citizens who live abroad for a calendar year (or at least 330 days within a 12 month period) are treated as having minimum essential coverage for the year (or period). These are individuals who qualify for an exclusion from income under section 911 of the Code.
Basically, under an existing rule, U.S. citizens living abroad are generally allowed to not pay U.S. tax on their foreign income as long as they meet certain requirements. Those requirements have gotten a lot stricter in recent years, but the gist is, once you've spent a full year (or almost a full year) living abroad, the IRS no longer considers you resident in the U.S. and you may go tax-exempt bananas. And if you qualify as non-resident for these purposes, the IRS will also treat you as having satisfied the mandate, so you won't have to pay the penalty after all.

Except.

The very technical rule about who's not a resident specifies that, among other things, you either have to have spent an entire tax year outside the U.S., or you have to have spent 330 days in a consecutive 12-month period outside the U.S. So unless you move to another country at the very beginning of the tax year, you're probably not going to qualify the first time you file as an expatriate. This kind of amounts to a bullshit exit tax on its own, but there are — legitimate — ways to offset most or all of your actual U.S. tax liability if you're already paying income tax in another country, so generally it works out okay.

However, as far as I can tell, there is no way to offset the ACA's penalty for failing to maintain minimum essential coverage. Ipso facto, now when you leave the U.S. you may have to pay a fine the first time you file taxes — ostensibly for not having healthcare but practically because you decided to live in another country. It's not a trivial fine, either; once Obamacare kicks in completely in 2016, it will be the larger of $695 or 2.5% of your family income.

To be fair, the penalty is pro-rated to account for any months in which you did have recognized coverage for at least one day, and you're also not liable if you didn't have health insurance for less than three months out of the year. So I guess if you leave the U.S. after September (and were covered while in the U.S.) you're also safe. But at the very least having to consider this kind of thing adds an extra layer of hassle to what is already a pretty hassle-heavy life decision. And what if you get offered a job elsewhere that starts in February? Good thing there are no good reasons to want to live in another country (free healthcare, ahem).

I should emphasise that I could very well be interpreting this entirely wrong — and even if I'm not, I'm not a tax attorney and you shouldn't be taking tax advice from me regardless. I would also note that the law has a pretty vague get-out-of-jail-free clause that says HHS can ultimately decide what constitutes coverage — so perhaps eventually they'll change their minds and come up with some system for counting foreign healthcare (whether private or state-run) towards your fulfillment of the mandate.

Until then, however, the sociology nerd inside me will continue to geek out, and the aspiring expat in me will continue to fume.

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