Welcome to Tax Hell, Little Earl of Sussex
Congratulations are in order to Prince Harry and Meghan, Duchess of Sussex, as they welcomed their yet unnamed son into the world yesterday. The new little Earl (he won’t get a Prince title like his cousins) weighed in at a healthy weighs 7lbs. 3oz and comes with a life long tax burden.
You see because his mother, The Duchess of Sussex, is still an American citizen and she lived in the United States long enough to pass on citizenship to her children, regardless of where they are born, the new little Earl will be eligible for a nice American passport.
While that can sound splendid, as having dual citizenship seems advantageous, it’s actually a tax nightmare.
All US citizens abroad are subject to the Foreign Account Tax Compliance Act (FATCA), including royalty. There’s no exception for being related to the sovereign of another nation. Nor does the United Kingdom get to simply declare the newest bundle of royal joy a UK citizen without any legal ties to the United States. And while you or I may be able to sneak a baby that hasn’t set foot in the United States past the watchful eye of the IRS, the Duke and Duchess of Sussex don’t have a chance.
FATCA requires that you report all bank accounts that have a worth of $10,000 or more to the IRS every year. That’s $10,000 at the highest balance, so if you have one bank account worth $10,000 and you close it and transfer that money to a second bank account, both have a high dollar value of $10,000 and the IRS expects to see that money twice–making you look richer than you actually are.
Additionally, the Earl will be subject to pay US taxes on any taxable income he may have. This isn’t so much of a problem for babies, but his mother, who still earns money through her television career, has to pay the same taxes. If she has a joint bank account with Prince Harry, the IRS gets its nose in there as well.
This law was designed to stop people who hide money abroad, but what it really does is make it difficult for US citizens living in other lands to bank. Many banks won’t accept US citizens, even if they also hold citizenship in the local country. Some of these people are what are called “accidental Americans”, like the new royal baby, who probably will never live in the United States, or the many children who were born while their parents were temporarily living in the US.
These laws can be a real problem as you expand your business globally. You may not be able to legally open a bank account for your business as it expands to other lands, depending on local laws.
The United States and Eritrea are the only countries in the world that requires taxes from their citizens abroad, and only the US has invasive looks into bank accounts.
The new baby can’t simply renounce his citizenship–nor can his parents do it for him. US law prohibits parents from dropping their offspring’s US citizenship, and the Earl must wait until he is at least 16, and probably 18. As he probably will have money in his name by this time, he may have to pay taxes in order to get out from under the thumb of the US government.
As an expat, subject to these crazy laws, I hope that this baby’s new tax misery helps congress see the ridiculous and invasive nature of FATCA, but I won’t hold my breath. Instead, I’ll just withhold my royal baby gift, because of the tax liabilities.