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Update: Obamacare penalty tax may apply to expats

We have previously commented that the Obamacare penalty tax for failure to obtain medical insurance would not apply to those individuals who were resident overseas.  But there are a number of “costs” (now classified as “taxes” by the Supreme Court) that individuals (and employers) will bear. We will discuss these in a later blog post.  However, today we would like to discuss one tax that may affect many overseas residents.

One of the taxes imposed by Obamacare is a 3.8% medicare tax on net investment income (unearned income) if your adjusted gross income is in excess of certain threshold amounts.

The current threshold amounts are $200,000 for single taxpayers, and $250,000 for married couples filing a joint return.

If your adjusted gross income exceeds the threshold amount the tax is levied on the lesser of the amount in excess of the threshold amount or your net investment income. (This could include any taxable gain on the sale of your home!!!!)

What has not been discussed in detail is the fact that this tax is not an income tax.

As a result, you may not use your foreign tax credits to offset this tax.  Thus, if your income exceeds the threshold amounts and you have net investment income you WILL pay this additional tax no matter how great your non-US tax liability.

As many will recall, until recently there was a similar issue with the Alternative Minimum Tax.  Irrespective of the amount of foreign taxes you paid you always owed at least a 10% AMT.  While this problem has been solved, Congress has yet again imposed a tax that you must pay no matter what.

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