U.S. Tax Penalty for No Health Insurance

[OliverKlozerof]

Taxes, and such bureaucratic tasks, being my least favorite thing to do, often get put off until they're urgent. My sister sent me an email last January...relaying a notice from a letter I'd gotten from the U.S. gov't about maybe having to pay a penalty if I didn't have health insurance.

I do my taxes online.

I'm retired. I own some mutual funds. I don't own any property or have any dependents. I live outside the U.S. TurboTax, though tedious, made it fairly easy to file. When it came to the Health Insurance part (I don't have any, and am fine about that, so please don't raise that issue), there was a way to say, 'Doesn't apply to me as I live outside the U.S.').

Last year TurboTax (Intuit company) nicked me $87 to file my taxes for me, which was a lot more than the previous year. So, this year I discovered TaxACT.com, which costs about half as much. Their interface isn't quite as good as TurboTax, but not bad.

Anyway, I'm wondering if anyone knows a way out of having to pay a 'health care penalty,' which, according to a cursory search, looks like it could be $600 or more! (And yeah, I know it would have been much better to look into the matter a few months ago.)

[Jingthing]

Taxact.com will allow you to claim the exclusion for living abroad. Haven't filed this year yet but it has in the past. 

[Sheryl]

If you file the foreign income exclusion that covers you.

 

But if you are retired and have no income (other than SS, pension etc) then I am not sure what happens.

[Jingthing]

16 minutes ago, Sheryl said:

If you file the foreign income exclusion that covers you.

 

But if you are retired and have no income (other than SS, pension etc) then I am not sure what happens.

I have had no issue claiming the ACA exemption with taxact without foreign income but I file with a Thai address. Perhaps the OP files with a U.S. address which would explain why he got that letter. 

Edited April 7, 2017 by Jingthing

[taxout]

"If you file the foreign income exclusion that covers you."

 

No, that's not quite enough.

 

If you're claiming an exemption from the insurance penalty, then you need to file Form 8965 with your return and explicitly claim the exemption. If you're claiming the exemption because of foreign presence or residence, then enter "C" as the exemption code.

 

https://www.irs.gov/uac/about-form-8965

 

Shouldn't be a problem if you were outside the U.S. more than 330 days in 2016 AND you attach Form 8965 to your return, File an amended return for 2015 if necessary.

[OliverKlozerof]

Thanks for the info, people. I'll look into it more closely tomorrow. Cheers!

[OliverKlozerof]

Yipes. I was in the U.S. 40 days last year = 325 days out. Close enough? How would they know??

[tonray]

14 minutes ago, OliverKlozerof said:

Yipes. I was in the U.S. 40 days last year = 325 days out. Close enough? How would they know??

They won't unless they ask for proof..then the burden is always on you. But in actuality Trump's executive order stated that the IRS does not need to enforce the penalty ...so this year unless something changes again....from www.fool.com

 

But the penalty is also prorated for only the months or portions thereof you were in the US. So no big deal for a month or so

 

 

"

In 2014 and 2015, the Internal Revenue Service (IRS) provided leniency to those individuals who failed to include proof of their health coverage during the previous year. However, the IRS had made it clear that any Form 1040s (the standard tax form) filed for the 2016 calendar tax year without line 61 filled in -- the line that would demonstrate to the IRS if you had health coverage or paid the SRP -- would be rejected.

But Trump's executive order changed everything.

 the IRS will once again be accepting electronic and paper tax returns for calendar year 2016 without line 61 filled in.

Now here's where things get tricky. On one hand, the ACA is still the health law of the land, even if it seems to be living on borrowed time. This means the individual mandate is still law, and those who choose not to purchase health insurance should be paying the SRP, unless they're exempt. On the other hand, without line 61 filled in, the IRS has no guarantee that the taxpayer paid the SRP or was even insured in 2016.

The IRS has suggested that if it has a question about a particular tax return it'll follow up with those taxpayers after the filing process is over. However, the IRS has also previously said that it wouldn't garnish wages or go after a person's property for not paying the SRP. In effect, Trump's executive order has made it nearly impossible for the IRS to collect the SRP or to concretely verify an individuals' health insurance status."

Edited April 7, 2017 by tonray

[Jingthing]

Yes, that's all true but keep in mind the executive order didn't actually change the law. It changed enforcement suggestions. I would say filing for the exemption explicitly when you seem to know you don't qualify is  something between yourself and your fill in the blank. 

[Sheryl]

11 hours ago, taxout said:

"If you file the foreign income exclusion that covers you."

 

No, that's not quite enough.

 

If you're claiming an exemption from the insurance penalty, then you need to file Form 8965 with your return and explicitly claim the exemption. If you're claiming the exemption because of foreign presence or residence, then enter "C" as the exemption code.

 

https://www.irs.gov/uac/about-form-8965

 

Shouldn't be a problem if you were outside the U.S. more than 330 days in 2016 AND you attach Form 8965 to your return, File an amended return for 2015 if necessary.

 

Wow! I did not know this and was all set to file, having not noticed anything that required this. So many thanks - this forum really pays off!

[lopburi3]

Just to be clear this form is for exemptions - if you have valid US health insurance for the full year it is not required AFAIK.  It was not filed on my TaxAct return and have full insurance for self and wife from US - but a worksheet of about 4 pages was reported.

[OliverKlozerof]

I was in the U.S. for 40 days. I'm leaning toward obeying the letter of the law. So, I guess I'll end up paying a penalty. Oh well. I guess, according to the intent of those who wrote the ACA, those of us who have enough dough in the bank, or for other reasons choose to "insure ourselves," have to contribute to the pool of money that helps others not so fortunate.

[Jingthing]

To expand a little more on this, I recall taxact demands that you say you have the exemption or not. If you claim the exemption with knowledge that you're not eligible that (I think) is quite a different thing then just leaving information BLANK on the question. I'm not sure taxact (or other online tax filing software) actually allows that. The executive order "enforcement suggestion" I think is more about a policy suggestion (rather than a changed law) to not go after people that file without stating information about the ACA mandated insurance either way. IF your tax software allows a BLANK return on that question, it may be sort of ethically OK (and somewhat "safe") to file it that way regardless of having the exemption or not. I think I miscommunicated before implying it is in any way OK to explicitly claim an exemption that you know you don't have.

 

I'm pretty sure there is also a legal exemption to the fines for LOWER INCOME filers though not sure about the details. Whether you have money banked or not is not definitely not relevant to this.

 

Cheers.

Edited April 8, 2017 by Jingthing

[lopburi3]

Yes there is a lower income provision and that is one of the reasons to file form 8965 in my reading.  

[ballbreaker]

If you are 65 or over you automatically have Medicare which is fully compliant with the Affordable Care Act.  Don't need any other coverage or pay penalty.

 

https://www.medicare.gov/about-us/affordable-care-act/medicare-and-the-marketplace.html

 

[OliverKlozerof]

1 hour ago, ballbreaker said:

If you are 65 or over you automatically have Medicare which is fully compliant with the Affordable Care Act.  Don't need any other coverage or pay penalty.

 

https://www.medicare.gov/about-us/affordable-care-act/medicare-and-the-marketplace.html

 

Good to know. But I'm 61. BTW, "When I'm 64" is a Beatles song. ;-)

[taxout]

First, if you're 65 (and have enough Social Security credits), you do get Medicare Part A free and Part A  does meet the Obamacare requirement. However, you don't get Part A "automatically," you have to apply for it.

 

Second, you don't necessarily fail the "outside-the-U.S." test if you spent 40 days in the U.S. in 2016. The 330-day test is applied to a rolling 12-month period, backwards and forwards. If, for example, you spent no time in the U.S. in 2015, six weeks in the U.S. in 2016, and no time in the U.S. in 2017, you'd still qualify. And if you don't qualify because you spent too much time in the U.S., you might still qualify if you were a resident of Thailand throughout 2016, since the test is based on either foreign physical presence or foreign residence. That is, the test works just like the qualification for the Earned Income Exclusion.

[OliverKlozerof]

4 hours ago, taxout said:

Second, you don't necessarily fail the "outside-the-U.S." test if you spent 40 days in the U.S. in 2016. The 330-day test is applied to a rolling 12-month period, backwards and forwards. If, for example, you spent no time in the U.S. in 2015, six weeks in the U.S. in 2016, and no time in the U.S. in 2017, you'd still qualify. And if you don't qualify because you spent too much time in the U.S., you might still qualify if you were a resident of Thailand throughout 2016, since the test is based on either foreign physical presence or foreign residence. That is, the test works just like the qualification for the Earned Income Exclusion.

Wow. Sure seems like you know the ropes.
Not exactly sure how the "12-month rolling period" works. 

I was in the U.S. from May 5 - June 17 in 2016 (40 days). 

And from June 18 - July 16 in 2015 (29 days).
I've not been outside Thailand so far this year.
I've resided in Thailand for 11 years (since 2006), with occasional yearly trips like this to the States, also a few trips to Philippines, Singapore, Laos.

 

BTW, here's a video from IRS explaining the SRP :

 

[taxout]

Compute whether you met the test on a month-by-month basis.

 

That is, for January 2016, were you outside the U.S. for at least 330 FULL days from February 1, 2015, through January 31, 2016. If you fail for any month looking backwards, then look forward and try again. So for February 2016, the backward period is March 1, 2015 through February 29, 2016, and the alternate forward period is February 1, 2016 through January 31, 2017.

 

I'll let you do the counting. Note what counts are FULL days outside the U.S.

 

In any event, it does sound like you qualify as a foreign resident for all of 2016, regardless of your days outside the U.S.

 

No need to submit any calculations or such to the IRS; just enter "C" as the exemption code on Form 8965.

[jmd8800]

I left the USA in April 2015 and since then I would qualify for exemption under this rolling period. I am assuming I would owe the shared responsibility for the tax year 2015 since I was in USA January -April 2015?

 

BTW.... while it has been said by executive order that the shared responsibility penalty need not be collected, I am going to file the exemption anyway just to be sure someone somewhere doesn't change their mind retroactively. Something like this might get struck down in a court or be a part of some larger piece of a puzzle legislators use as a bargaining chip.

[Jingthing]

No. The executive order does not exactly say the penalty won't be collected. It's not that strong. It was written with the expectation that the mandate and penalties would soon go away by LEGISLATION. That has not as yet happened. Yes, do go ahead and file the exemption. 

[TallGuyJohninBKK]

9 hours ago, taxout said:

Compute whether you met the test on a month-by-month basis.

 

That is, for January 2016, were you outside the U.S. for at least 330 FULL days from February 1, 2015, through January 31, 2016. If you fail for any month looking backwards, then look forward and try again. So for February 2016, the backward period is March 1, 2015 through February 29, 2016, and the alternate forward period is February 1, 2016 through January 31, 2017.

 

 

Maybe it's just the words you used above. But AFAIK, you don't meet or fail the residency test "on a month by month basis."  You meet or fail it on the basis of being an expat (outside the U.S.) for enough days during some 12 month period, AFAIK.

 

The way I've always understood it, is it's that 12 month period that can be flexible (rolling), as long as it includes some month in the pertinent tax year, which in this case is calendar 2016. So, you could apply the test for Jan to Dec. 2016. But as I understand it, you could also apply the test from Dec. 2015 to Nov. 2016, and so on and so forth. So as long as you have had some consecutive 12 month period touching the pertinent tax year where you were outside the U.S. for the required number of days, you've passed the test.

 

That's the way I've understood how the "rolling" period is applied..  If that's not correct, I'm happy to stand corrected.

 

[OliverKlozerof]

10 hours ago, taxout said:

Compute whether you met the test on a month-by-month basis.

That is, for January 2016, were you outside the U.S. for at least 330 FULL days from February 1, 2015, through January 31, 2016. If you fail for any month looking backwards, then look forward and try again. So for February 2016, the backward period is March 1, 2015 through February 29, 2016, and the alternate forward period is February 1, 2016 through January 31, 2017.

I'll let you do the counting. Note what counts are FULL days outside the U.S.

In any event, it does sound like you qualify as a foreign resident for all of 2016, regardless of your days outside the U.S.

No need to submit any calculations or such to the IRS; just enter "C" as the exemption code on Form 8965.

Yay.
BTW, I searched "12-month rolling average" to try and understand it better. This seems like a pretty good explanation, but since it is now moot to me (and because I find stuff like this incredibly tedious), I still can't say I understand it completely. ;-)
http://www.ehow.com/how_7834292_calculate-rolling-12month-average.html

[OliverKlozerof]

Thanks, everyone for your input. T/V rocks. And, it may seem trite to express appreciation for intelligence and civility on the web, but to me, it is not a small thing at all, as it's so rare. ;-)

Edited April 9, 2017 by OliverKlozerof
typo

[OliverKlozerof]

FYI...
When I decided to try taxact.com instead of turbotax.com this year (about half price), one thing I was worried about was if I could still connect to my Charles Schwab investment account to automatically import all necessary tax info. 
While taxact.com does have this feature, they oddly don't list Schwab (one of the major players in the field), in their list of companies you can link to. Their workaround is to export a CSV file from Schwab, then import that into taxact.com. 
They have a page with instructions about how to do this from a variety of companies' sites. However, as you might expect, something probably changed between the time they wrote these instructions and now. Anyway, I was able to create an export file. But, when you import it, you have to manually try to assign the field names to match the fields required by taxact.com, which is not real clear. 
In other words, the process is nowhere as smooth as it was with turbotax. Still, because I'm a computer consultant and have had to do this kind of export-import-field assignment before, I got it to more-or-less work after a few minutes. 
Then, toward the end of the return there's an option to basically, "check everything." So, it now tells me that, because I did the CSV import, I have to check the "basis" (which I guess is the purchase price of an investment?), and choose the correct "reporting category." They say they have a Stock Assistant feature that may help with this.
Then, just at this point, a message pops up saying that, as they will take their servers offline in 5 minutes for maintenance, I need to sign off and log back on in 15 minutes.
Would it be worth an extra USD$40 not to have to hassle with this? Probably. But you never know until you try. ;-)

 

[Jingthing]

Thanks for all the good info about the rolling average thingie. Regrets for posting simplified information before that didn't take that complexity into account. I've never had to deal with it myself as I've always been clearly under the expat exemption, but it's good to know!

[TallGuyJohninBKK]

The IRS Publication 54 (Tax Guide for U.S. Citizens and Resident Aliens Abroad) for 2016 year returns has a discussion of the 330 full days during a period of 12 consecutive months rule for meeting the physical presence test.

 

It seems clear from the discussion in the document that the 330 full days abroad in a period of 12 consecutive months doesn't have to match with the exact Jan. to Dec. period of a particular tax year.

 

The details of the bona fide resident and physical presence tests are on pages 14 and 15 of the document, including the following discussion on the physical presence test.

 

https://www.irs.gov/pub/irs-pdf/p54.pdf

 

Quote

 

330 full days. Generally, to meet the physical
presence test, you must be physically present
in a foreign country or countries for at least 330
full days during a 12-month period.

 

 

Quote

 

How to figure the 12-month period. There
are four rules you should know when figuring
the 12-month period.

 

Your 12-month period can begin with any
day of the month. It ends the day before
the same calendar day, 12 months later.

Your 12-month period must be made up of
consecutive months. Any 12-month period
can be used if the 330 days in a foreign
country fall within that period.

You don’t have to begin your 12-month period
with your first full day in a foreign
country or end it with the day you leave.
You can choose the 12-month period that
gives you the greatest exclusion.

In determining whether the 12-month period
falls within a longer stay in the foreign
country, 12-month periods can overlap one
another.

 

 

Quote

Example 2. You work in New Zealand for a
20-month period from January 1, 2015, through
August 31, 2016, except that you spend 28
days in February 2015 and 28 days in February
2016 on vacation in the United States. You are
present in New Zealand for at least 330 full
days during each of the following two 12-month
periods: January 1, 2015 – December 31, 2015
and September 1, 2015 – August 31, 2016. By
overlapping the 12-month periods in this way,
you meet the physical presence test for the
whole 20-month period. See Figure 4-B on the
top of this page.

 

So as I mentioned before, the implication seems to be that you can pick ANY consecutive 12 month period that touches on a particular tax year when it comes to calculating your required 330 days abroad.

 

For example, let's say you were in Thailand for all of 2015, never left. But then you took a 2 month trip back to the U.S. for Jan and Feb. of 2016, and then returned to Thailand and lived there continuously from March 1 2016 through present time in 2017

 

You clearly would meet the physical presence test for the 2015 tax year because you lived abroad for the entire tax year. Then for the 2016 tax year, I THINK (but am not certain) that you could count your consecutive 12 month period as running from March 1 2016 through Feb. 28, 2017, and still qualify based on that consecutive 12 month period.

[TallGuyJohninBKK]

Another link and info on the physical presence test below:

 

https://www.taxesforexpats.com/articles/expat-tax-rules/physical-presence-test-faq.html

 

Quote

 

Does the 12 month period that determines my physical presence need to coincide with the tax year?

No. Any twelve month time period can be used, as long as the 330 days are contained within it. Expats usually start the twelve month period with their first full day in their foreign home.

Does my 12 month time period need to be the same every year?

No. Each year is different, and your physical presence period is not a tax year but simply 365 consecutive days.

 

 

And this below seems to suggest that you can count time abroad in the time between the end of a tax year (Dec 31, 2016) and the (spring 2017) date when you file your federal return as part of your required 330 days abroad to meet the physical presence test for tax year 2016.

 

Quote

 

I will not have reached 330 full foreign day requirement by tax time. What do I need to do?

Remember that you have until June 30th to file while living overseas, but you may also need to file for the additional extension. If you file before you have passed the PPT, you will not qualify for the Foreign Earned Income Exclusion. If this happens, you will receive a tax bill from the IRS just as if you had earned your wages on US soil. The foreign filing extension is in place to aid you, and you should take advantage of it until you have passed the PPT. You need to wait to file your tax return until you have qualified for the exclusion.

 

 

 

Edited April 9, 2017 by TallGuyJohninBKK

[TallGuyJohninBKK]

I think I have a bit more clarity about the flexible 12-month period during which you need to have been out of the U.S. for 330 full days or more -- the physical presence test.

 

In going thru my various tax info papers tonight, I came across advice on the subject that I received last year from TurboTax, as follows:

 

"The 12-month period can begun any day of the year [meaning calendar or tax year, since they're generally the same] and ends 12 months later. Be sure to select a 12-month period that allows the greatest qualifying period."

 

So, the place where that flexibility could come into play is if, for example, you wanted to take an extended vacation in the U.S., it would be best to do it early in the calendar/tax year, like between Jan. and March 2016. Then you could start your 12 month period after that and then have it run into the early part of the next year (2017), ending any time prior to when you file your taxes that spring, and still meet the test.

 

Because, the law/regs only require your 12 month period to BEGIN on a day within the calendar/tax year. But it's fine if that 12 months ends in the following year. And as previously noted above, it's no problem to have overlapping 12 month periods. So your 2017 tax year 12 month period could begin Jan 1 2017, even though that period was already part of your 2016 tax year 12 month period.

 

[Sheryl]

....
I was in the U.S. from May 5 - June 17 in 2016 (40 days). 
And from June 18 - July 16 in 2015 (29 days).
I've not been outside Thailand so far this year.
I've resided in Thailand for 11 years (since 2006), with occasional yearly trips like this to the States, also a few trips to Philippines, Singapore, Laos....

sounds like youwouldmeet the "bona fide residence" test which is alternative toothe 330 out of 365 days.