There has been great excitement in the press about the impending marriage of Prince Harry and Meghan Markle. However, there might be some problems for the couple because of Ms. Markle’s American citizenship. Rob Wood returns to discuss how the IRS could affect the Royal Family, a topic he has also discussed in his Forbes article, “Meghan Markle & Prince Harry Filing Taxes Separately? Here's Why.”
Wood says that the concern that has gotten the most attention is the possibility that the Royal Family’s financial affairs could be subjected to a lot of public disclosure they would prefer to avoid. But everything starts with a tax return. In the USA, at least most married couples file joint returns. For Prince Harry and Meghan Markle, the questions are whether the couple would file a joint tax return and whether she would remain an American citizen.
Wood explains that, in his experience, most married couples, especially young ones, start filing joint returns as a matter of course. In fact, 95% of returns by married couples are joint filings, according to the IRS. The reason is that there is a slight tax break for joint filers.
This becomes important when two people have different passports. If you have an American passport, you are considered a US resident taxpayer, and you are then required to report any income you have from anywhere in the world. This is true even if you live somewhere else and pay taxes in that other country. If Prince Harry and Meghan Markle file a joint tax return, Prince Harry would then come under IRS jurisdiction and be required to make disclosure to the IRS of all his income and investments worldwide.
Wood says that disclosing foreign income in a US tax return is not a new issue. What is new is the Foreign Account Tax Compliance Act (FATCA), enacted in 2010. FATCA requires American citizens to disclose holdings in foreign banks. The real bite in the law is that it requires foreign banks to report on American account holders if the account holders didn’t report on themselves. If Prince Harry were to file a joint tax return with Meghan Markle, he would be required to report on Royal Family assets abroad.
The solution to the various potential problems will likely be for Ms. Markle to renounce her American citizenship. Wood expects that this will, in fact, occur. However, the act of renouncing an American citizenship takes some doing. Wood notes that most of the people who renounce their American citizenship do so not for reasons related to patriotism, but for financial or other reasons. But there is more to renunciation than simply turning in one’s passport.
Of course, surrendering one’s passport is the first step. A short interview is required. It is relatively simple unless you are doing it at a consulate outside the US, where there might be a considerable waiting list. The other part of this is a requirement to file a form with the IRS certifying that one has been fully tax compliant for five years. There is also a fee of $2,350 to be paid. This “exit tax” rubs a lot of people the wrong way.
Wood says that as many as 6,000 Americans renounce their citizenship annually. One of the reasons for this is FATCA. Because the law targets foreign banks who have American account holders, many small banks refuse to deal with Americans. The burden on a small bank to comply with the IRS disclosure is too much of a burden.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.