Meghan Markle and the long arm of the IRS: What US citizens living abroad need to know
As a member of the Royal Family and a British citizen, Meghan Markle is in a chapter of her life most commoners will never experience. But, thanks to US tax laws, she will experience a headache US expats understand all too well.
As many US citizens and green card holders living abroad know (and many more don’t), the reach of the Internal Revenue Service (IRS) extends across the globe. The United States is the only country in the developed world that imposes tax based on both citizenship and residency. No matter where in the world they live, US citizens—including Meghan Markle—must annually file tax and information returns. The same is true for anyone who’s ever held a US green card and didn’t terminate it properly.
“Most US persons who are UK residents don’t pay US tax, but they must still file tax returns, along with a bevy of information-reporting forms that carry high monetary penalties if not submitted on time,” said Alexander Marino, JD, LLM (US Tax) of Moodys Gartner Tax Law.
Marino explains that because of the US Foreign Account Tax Compliance Act (FATCA) and agreements between the British and American governments, HM Revenue & Customs now shares information gathered from UK banks with the IRS.
“It’s now much easier for the IRS to identify non-compliant US individuals abroad than it was even five years ago,” said Marino.
Markle’s situation is unique but the rules that apply to typical citizens apply to her, too.
“As a former TV star and now a British royal, Mrs. Markle’s financial affairs are certainly more complicated than those of the average UK-resident US person,” said Marino. “She’s acquired her second citizenship through naturalization rather than being born with it, so she is subject to the US ‘exit tax’ regime.”
In simplified terms, this means that if she has a net worth of more than $2 million USD at the time of renunciation, she will be treated by the United States as if she sold all of her assets the day before renouncing and will be taxed on the built-in gain. She also needs to avoid being affected by the Reed Amendment, which bars former US citizens who renounced for tax purposes from reentering the United States.
Additionally, US tax laws will impact any children that the royal couple may have. Under US law, a child born to a US parent and a non-US parent outside the United States is automatically a US citizen if the US parent lived at least five years in the United States, including at least two years after turning age 14. In Markle’s case, her children will be dual citizens at birth. They’ll have the same tax and information reporting requirements as their mother for as long as they keep their US citizenship, and things only get more complicated from there.
On the positive side, there are measures US citizens can take to avoid some of these same issues. Marino says being aware is key, and that anyone with US connections should carefully check their US status and, if it applies, make sure they’re compliant with all of their annual filing obligations.
“It’s definitely possible for a Briton who’s never had a US passport, hasn’t lived in the US since childhood, or who’s never even visited the US to be a US citizen and not realize that they need to be annually filing,” said Marino.
The IRS currently offers a very attractive amnesty program for non-filers living outside the United States, but it’s doubtful that program will be around forever. The 2017 US tax reform introduced special taxes that can hit US individuals living outside the United States particularly hard: a one-time “transition tax” on the retained earnings of non-US corporations they may own and a new annual tax on income generated by certain assets of such non-US corporations.
“My focus as a lawyer is helping individuals who want to renounce to do it in a way that’s efficient from both a tax and an immigration perspective and also tailored to their circumstances,” said Marino.
“I’ve helped more individuals renounce than any other lawyer I know. Many still visit US family and friends regularly, vacation in the US, own second homes in places like Florida or Arizona, or go back temporarily on business visas. I’m always willing to speak with folks who have questions about US status, US tax obligations, and the pros and cons of renouncing.”
Alexander Marino of Moodys Gartner Tax Law will be presenting a complimentary seminar for those interested in learning more on October 27, 2018, at The Savoy Hotel in London.