Paul L. Caron

Wednesday, November 29, 2017

Meghan Markle’s U.S. Citizenship Could Cause Tax Headaches For British Royal Family

Washington Post, Meghan Markle’s U.S. Citizenship Could Cause Tax Headaches For British Royal Family:

It may seem like a modern fairy tale, but the upcoming wedding of Britain's Prince Harry to American actress Meghan Markle will come with some mundane hurdles. Perhaps most inconveniently for the British royals, this transatlantic partnership could end up involving the United States' Internal Revenue Service.

Buckingham Palace announced Tuesday that Markle will become a British citizen after her wedding next year. Though some foreign politicians are required to give up their dual citizenship, there are no similar rules for British royals — and there has already been widespread speculation that the union of Harry and Markle could eventually result in some British royal children wielding American passports.

But there's a big obstacle in the way: American tax laws. "U.S. citizens are subject to U.S. tax obligations regardless of their country of residence," wrote Peter Spiro, a Temple University law professor and the author of At Home in Two Countries: The Past and Future of Dual Citizenship in an email to The Washington Post. "A member of the royal family would be treated just like anyone else."

By contrast, if Harry were to move to the United States to live with Markle, he would not be expected to file taxes in Britain. America's citizenship-based taxation system is unusual: Only Eritrea has a similar system. It's a relic of the Civil War and the Revenue Act of 1862, which called for the taxing of U.S. citizens abroad — in part to punish men who fled the country to avoid joining the military.

For Harry, the issue isn't that he will suddenly end up paying U.S. income tax, but rather that Markle's American citizenship could open up the secretive finances of the royal family to outside scrutiny. If she remains a U.S. citizen, Markle will have to file her taxes to the IRS every year. And if she has more than $150,000 in assets at any point during the tax year — a likely scenario given her successful acting career and the family wealth of her husband — she will be expected to annually file a document called Form 8938 that will reveal the detail of these assets, which could include foreign trusts.

(Hat Tip:  Georgia Chadwick.)

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I am sure that the royals will have the best tax and compliance advice, best 2nd opinion, and some weight to possible innuendo that if the advice is not right that the advice giver will end up in The Tower of London.

For the mere mortals, of the 9 million U.S. person family members living overseas, the tax and compliance complexity and obligations, and local banking difficulties stemming from U.S. FATCA, are a minefield of catch 22 gotchas completely divorced from the notions of the U.S.A. they were raised to believe, such as the U.S.A. is “the land of the free….with liberty and justice for all.“

Many of the comments on the topic are devoid of the human side, assume that U.S. citizenship is treated very casually, and assume that persons may see into the future and know exactly what they will be doing and where for the rest of their lives.

Thus we see rising numbers of those renouncing citizenship, most who have already lived overseas for years if not decades.

Posted by: JC Double Taxed | Dec 1, 2017 1:34:51 PM

I'm fairly certain that one of the requirements for the Queen's consent was that the kids would be exempt from US tax; i.e., not US citizens. Harry can't marry without his grandma's consent. You’d think that Markle would have to formally renounce her US citizenship. She need not do so; merely marrying Harry is an expatriating action. The list of such actions includes naughty things like treason, but that’s not our Markle. She’s this simple one: “Taking an oath, affirmation or other formal declaration of allegiance to a foreign state or its political subdivisions after the age of 18 (Sec. 349 (a) (2) INA).” This occurs when she marries him. I can't imagine a more formal declaration of allegiance to a foreign state than marrying an heir to the throne!

Posted by: Liz Zitzow, EA | Dec 1, 2017 10:19:17 AM

I'm sure they are already working on a solution. Why doesn't Boris Johnson file a US return. Technically, he is still a US citizen.

Posted by: The Pamphleteer | Nov 30, 2017 5:21:08 PM

"there has already been widespread speculation that the union of Harry and Markle could eventually result in some British royal children wielding American passports."

End the Civil War tax code and dual citizenship. Also, we should have a clear definition of "natural born" and here is mine:

"Any child born to two American parents shall be granted citizenship regardless of place of birth. Any child born to one American parent shall be granted citizenship as long as he or she is born in one of the States or the District. Congress shall have the power to determine immigration and citizenship requirements for everyone else."

- A New Constitution for a Free People

Posted by: Serket | Nov 30, 2017 3:38:18 PM

Renouncing citizenship in order to not pay taxes would be a huge public image debacle. The whole media darling fairytale of this wedding is based in part on her being an African-American. For her to renounce citizenship to save a few bucks will trigger a huge backlash.

Posted by: Rory | Nov 30, 2017 10:15:47 AM

Assuming that the royal assets are held in multiple trusts, Markle will probably become a beneficiary of one or more of these trusts, and will have to file form 3520 to report distributions she receives and the amounts that are treated as income for US tax purposes. This is hardly a simple form, but her situation will not be unique, and I am sure the royal family can afford good tax accountants.
Also, assuming she files as Married Filing Separately, the requirement to file form 8938 will kick in if only if the total value of her specified foreign financial assets is more than $200,000 on the last day of the tax year or more than $300,000 at
any time during the tax year.

Posted by: Whitey | Nov 30, 2017 9:30:26 AM

Repeal and Replace the Revenue Act of 1862? It is the GOP after all.

Posted by: MSO | Nov 30, 2017 7:01:14 AM

Hey Royal Family, how do you like taxation without representation now? It's a couple centuries late, but we finally get our revenge (well, other than that whole revolution thing)!

Posted by: James H | Nov 30, 2017 6:59:56 AM

Trivial solution would be for the British government to ask the US government to classify any IRS documents involving British Royals. I doubt that Trump, or any future Ruling Party politician would decline the request.


Posted by: John C. Randolph | Nov 30, 2017 6:32:02 AM

Churchill would have been eligible to claim US citizenship, but under the rules of the time it wasn't automatic.

Posted by: Texcritic | Nov 30, 2017 5:08:41 AM

And then there will be the issue of complying with FACTA, the relatively new law the requires any financial institution having accounts of US Persons to report transactions to the IRS, as well as the Treasury regulation requiring US Persons to report their non-US bank accounts.

Posted by: Ewin Barnett | Nov 30, 2017 4:44:20 AM

And let’s not forget FATCA.

Posted by: Anthony | Nov 30, 2017 4:09:27 AM

Quote: "A member of the royal family would be treated just like anyone else."

I suspect I'm not the only one who wants to see members of the British royal family treated "just like everyone else" in the U.S. and in the U.K.

I suspect she'll just give up her U.S. citizenship. As well connected as her family is, she could easily get it back if she wants.

Posted by: Michael W. Perry | Nov 30, 2017 4:07:41 AM

and the easy solution would be to rescind the Revenue Act of 1862

Posted by: Peterk | Nov 29, 2017 11:40:31 AM

Not much of an issue. Ever year hundreds of US citizen renounced their citizenship, mostly for tax purpose. She can simply renounce her citizenship. The tax folks weren't this aggressive back in Winston Churchill's day, as he's technically an US citizen as well (his mother was American).

Posted by: BigFire | Nov 29, 2017 10:20:34 AM