Fairy Tales and Taxes

 

Wedding bells are ringing this weekend in merry ol’ England for the House of Windsor as American, Meghan Markle, marries Britain’s Prince Harry, Queen Elizabeth’s son. While they will no doubt receive a castle full of wedding gifts, one they may not anticipate is a gift from the good old IRS. As many of my Ex-Pat clients can attest, Americans living abroad have some rather painful tax headaches not the least of which is reporting worldwide income and disclosing assets as well as tax filing obligations. Most tax experts, myself included, would at a minimum suggest filing separate tax returns, but she may want to actually take the big step of renouncing her US citizenship. Even doing that can be expensive.

United States citizens working and residing in foreign countries must generally pay tax where they live. However, they are also required to continue to file U.S. tax returns reporting all of their worldwide income. While they get a foreign tax credit, that often offsets U.S. tax, this is not the case in all situations and can lead to double taxation.

In addition, the reporting requirements of foreign assets are extensive and are accompanied by stiff civil penalties and even criminal exposure for failing to report those assets.  

Even renouncing citizenship is not always the answer and can cost a pretty penny to do. The United States charges a flat fee of $2,350 to simply hand in your passport and relinquish your citizenship. In addition, taxpayers seeking to relinquish citizenship are required to prove five years of tax compliance with the IRS which can often be expensive and lead to additional penalties if there are errors in reporting. Lastly, believe it or not, the United State charges an exit tax for citizens renouncing their citizenship that have net worth over a certain amount. That can be quite a hefty price tag to renounce citizenship.

No doubt, Ms. Markle will have the best and brightest tax minds ensuring that Prince Harry’s wealth does not inadvertently become subject to U.S. tax, but as you can see, it is hard to break up with Uncle Sam.