Ingleton Partners’ Tom LR Griffiths on how even the new addition to the royal family may have to pay US taxes
Tom LR Griffiths is a tax advisor and consultant, specialising in US expatriate tax matters
Tom LR Griffiths
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Tom LR Griffiths on why even the newest royal baby might have to pay US taxes

Tom LR Griffiths on why even the newest royal baby might have to pay US taxes

The newest addition to the royal family has something in common with all other US expats – when he starts earning, he might have to pay US taxes. Baby Sussex was born to Prince Harry and Meghan Markle, Duchess of Sussex, on 6 May 2019.

And while he immediately became seventh in line to throne, Archie Harrison Mountbatten-Windsor, is also a US citizen due to his mother’s lineage. While Kensington Palace confirmed to CNN that Meghan Markle will become a British citizen, this takes a number of years. They also say that it’s “too early to say” whether she will keep dual US/UK nationality.

If she chooses to renounce her US citizenship, then Archie won’t have dual nationality. But if she doesn’t choose to do so, Archie could find himself filing US taxes when starts earning.

All US citizens must pay US taxes

Regardless of where they live, US citizens have had to pay tax on their worldwide income since the Revenue Act came into force in 1962. Despite the liability for US expats living in the UK and other European countries, most don’t actually have to pay much, due to double taxation agreements in force.

As well as tax liability, US expats must also report any foreign bank accounts they hold if the balance is more than $10,000 at any point during the previous 12 months. In addition, the Foreign Account Tax Compliance Act (FATCA) was introduced in 2010 to crack down on US citizens hiding financial assets overseas. It’s worth checking current guidelines surrounding FATCA, as the IRS and the US Government’s Treasury Department often update the legislation.

FATCA and FBAR requirements

FATCA dictates that US expats that hold financial assets overseas must report these to the IRS using Form 8938, which is the Statement of Specified Foreign Financial Assets. This requirement is on top of the long-standing necessity of reporting Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114.

It’s worth noting that many US expats don’t realise they need to file an FBAR. This is because it’s not just limited to savings and current accounts, but also covers trusts. Mutual funds, business accounts on occasion and foreign pension plans.

As well as demanding more in-depth reporting from US citizens, FATCA also requires banks to report any funds or accounts held by US expats to the US Government. Since 2010, there have been problems surrounding FATCA, including some banks closing accounts held by average US citizens, rather than successfully targeting individuals who are hiding substantial amounts.

On 1 April 2019, a US Government study found that FATCA is officially considered to have major shortcomings and make recommendations to the Treasury, Congress and other agencies to improve the reporting of foreign assets. They say that around 75% of US citizens reporting foreign assets to the IRS also did so to the Treasury, strongly indicating duplication. Perhaps more problematic, some US expats living overseas are precluded from using foreign banks as the institutions find compliance too burdensome.

US tax system is one of the most complex in the world

The only other country in the world that taxes its citizens living and working abroad is Eritrea. Some organisations in the United States use this as a reason to lobby for changes to the taxation system. For example, American Citizens Abroad (ACA) want it to change to a residence-based system.

However, the situation as it stands means that the US tax system is one of the most complex in the world. And it’s arguably more complex for US expats. Many US expats are married to citizens from different countries and have lived abroad for a significant number of years.

Some US expats consider renouncing US citizenship to avoid tax filing requirements, but many either don’t want to, or find that they are not eligible to do so. There has been a significant leap in citizen renunciations by US expats, from 226 in 2008 up to 5,411 in 2016. However, this is still a small percentage of the entire number of US expats living in the UK.

US expat tax filing deadline approaching

We are fast approaching the tax filing deadline for US expats of 17 June 2019 for the 2018 tax year. It is possible to get an extra extension until 15 October 2019, but this must be separately applied for using Form 4868.

US taxes are reported on a calendar year basis even if the country expats are living and working in is on a fiscal year basis. This applies to the UK, which starts the tax year on 1 April every year.

As you can see, tax matters for US expats living and working in the UK can be complex. If you’re not sure what you owe, what you need to file and how US tax laws affect you, it’s important to engage an international tax expert.