Did you know there was a wedding in the British royal family recently?
The pageantry! The pomp! The ratings!
From the snippets I saw, there were a lot of guests.
There were ladies in hats the size of small towns. There were military men struggling to stand upright with all the medals on their chests. The bride and groom’s posh friends.
There were even a few Americans, including the bride.
The cameras sought photogenic attendees, but the invisible guests interested me. They were there if you knew where to look.
My mind’s eye spotted one in particular … uninvited, of course … sitting in the metaphorical front row.
It was the Internal Revenue Service…
Marrying Into Money
The recent royal wedding — between an American and a Brit — offers some lessons about how we Americans are taxed when we live and marry abroad.
Her Royal Highness, the Duchess of Sussex, née Meghan Markle, married a British fellow named Prince Harry. He happens to be sixth in line to the British Crown.
He also happens to be fabulously wealthy.
Not that Harry has to work, of course.
He gets about half a million dollars a year from the trust of his mom, Diana, Princess of Wales. (Diana practiced good estate planning.) He also gets a big clothing and travel allowance from his dad, Charles, the Prince of Wales.
He must get a British army pension as well. He served 10 years’ active duty and is a captain in the reserves.
And now it’s all reportable to the IRS.
A Royal Tax Mess
The British royal family keeps its money under wraps. That isn’t easy, because it has a lot of it … about half a billion dollars.
Thanks to the Panama Papers leak, we know that much of it is in offshore trusts on tropical islands like Bermuda and the Cayman Islands. Presumably many of those trusts name Prince Harry as a beneficiary.
Since Prince Harry is now part of the household of a U.S. taxpayer, his financial affairs — and those of the entire royal family — are now reportable to the IRS:
- As long as she is an American citizen, the Duchess of Sussex will have to file a 1040 tax return to the IRS every year, like everyone else. She must report all her worldwide income, including anything she gets from her husband or the royal family.
- As a permanent resident of the U.K., Meghan won’t have to pay tax on the first $104,400 of any earned income … such as her salary as a TV star. But she’ll owe U.S. income tax on all her investment income … including anything she gets from Harry and his royal relatives’ trusts.
- Under the Foreign Account Tax Compliance Act (FATCA), she’ll have to file a Form 8938, Statement of Foreign Financial Assets. That must state the total value and details of her foreign financial assets — including any joint accounts she has with Harry, or any financial interest she has in his family’s trusts. That includes those secretive trusts on tropical islands.
- Also under FATCA, all the banks where Meghan and/or Harry have accounts, and all the administrators of trusts in which either of them have an interest, will have to report those details to the IRS … no matter where in the world they are.
If Meghan decides to renounce her U.S. citizenship, as tens of thousands of us do every year, she’ll have to pay tax on her net worth on the day she does so … including her foreign wealth. But under U.K. law she can’t become a citizen for another five years.
That’s five years of IRS reporting … no ifs, ands or buts!
(For more information on offshore bank accounts, click on the YouTube video below.)
The Colonials Strike Back
The United States is an odd country. We’re one of only two that taxes its citizens’ worldwide income. (The other is Eritrea.)
The U.S. is also the only country that demands that other countries enforce our tax laws … even if they contradict their own laws. Any bank or trust administrator that fails to report Meghan and Harry’s wealth to the IRS loses access to the U.S. banking system.
But here is one bright spot. The U.S. is a democratic republic. Our laws apply to everyone, royal or commoner.
That includes you … and if you should decide to live and/or marry abroad, everything I’ve explained here will apply to you, too.
Who knows? Maybe Meghan can recommend a good tax attorney.
Editor, The Bauman Letter
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