Millions of people across the globe followed the charming story of Meghan Markle and Prince Harry and tuned in to catch at least a glimpse of their royal wedding ceremony. Although most of the attention devoted to the couple has been focused on more romantic matters, the nuptials have also served as a spark for conversations about taxes.
Why is this so? It starts with the fact that the United States, unlike the vast majority of countries, requires all of its citizens and those with permanent resident status to file tax returns and report their global income, no matter where they live. The IRS's reach even extends to non-U.S. citizens with certain financial interests located in the U.S.
With that in mind, there are actually two related but distinct tax issues facing the new Duchess of Sussex. The first is that she will be residing outside of the U.S. and will presumably conduct most of her financial business abroad, although she has done this before when living and working in Canada. The second significant matter, from a tax perspective, is that her husband is a foreign citizen, which presents a dizzying set of choices regarding how to list him on her tax return, how much of his income he needs to report to the IRS, and what implications those choices have on the Duchess's own tax liabilities.
As noted above, the Duchess, as a U.S. citizen, will need to file annual tax returns and report her worldwide income. This "income" can include gifts, hospitality, and even loans of valuable items under certain circumstances. Examples of potentially reportable items include her residence - if she lives in lodgings provided by the Queen - and any jewelry or regalia provided for the Duchess' use.
She will also need to report the value of any benefits she receives from assets in certain types of trust, and the tax rates on these can be significant - up to 37%. And if she wants to give gifts to her husband, she needs to keep track of their value, as there is an annual cap on what she can give without lowering her lifetime estate and gift tax exemption.
On top of all of these things, she must report any and all bank accounts to which she has signing authority or financial interest that held over $10,000 in assets at any point in the year. This information should be added to her Report of Financial Bank and Financial Accounts (
FBAR), which goes to the Financial Crimes Enforcement Network at the U.S. Treasury.
All of this could persuade the former Ms. Markle to consider renouncing her U.S. citizenship - a course that more and more people are taking. But there can be significant costs and reporting burdens associated with this route as well.
One reason for the reach and complexity of U.S. tax rules is that Congress's approach to tax legislation has been to add new provisions in a piecemeal fashion, often in response to various incidents and reports of abuse. As a result, taxes are one area in which the government seems to consider you "guilty" until proven otherwise-a stance that doesn't always lead to a fairytale ending.
The best approach - for the Duchess Meghan and anyone with combined U.S. and international tax obligations - is to work with a qualified tax advisor to keep everything straight. Because while the cost of compliance can seem high, the penalties for non-compliance can be significant.
