When a US/UK child is born…

Unless you have been living on Mars you will have heard that Prince Harry and Meghan Markle are expecting their first child!

Whilst this may be of minor interest to the non-royalists out there, for those interested in US tax (surely a larger target audience) there will be US tax consequences for the future lord/Prince or lady/Princess.

Meghan, as a US citizen and as someone who would have been residing in the US during the 5 year period prior to her child ‘s birth, will automatically pass on her US citizenship to her child. In fact, the new royal will be a dual US/UK citizen.

This might not be welcome news giving that the US tax system stretches around the entire globe for US persons and seeks to tax them on their worldwide income regardless as to whether they are living in the US or not!

Whilst tax treaties in place with the US may allow US taxes to be offset on income that would otherwise be double taxed, there is no guarantee that this will be the case.  In particular, where income and gains are not taxable in the other country (for example, ISA investment income and the sale of someone’s UK private principal residence) US taxes may arise on such income. Not only that, but the US tax rates can be highly punitive in some cases.

Giving up US citizenship is of course an option for dual citizens, but US immigration advice is often recommended and consideration as to whether “exit” taxes will be payable in the US by the act of expatriation is required.

An often over quoted example concerns the former Mayor of London and MP Boris Johnson. He got into hot water with the IRS when he sold his UK home. This turned out to be reportable and taxable in the US due to his US citizenship (baby Boris was born in the US and lived there until he was 5 years old).   He was required to not only settle US taxes on the sale of his home (~$50,000) but was also required to file delinquent US tax returns for a number of years in order to not only become US tax compliant but also because he wanted to relinquish his US citizenship.

Incidentally, those that can often be perceived as “Accidental Americans” who have not filed US tax returns for a number of years (simply because they did not know that they needed to) may qualify for the streamline filing program. Please click the link below for more information on this subject.

Streamlined Filing Compliance Procedures

So what are some of the US tax issues that the royal baby (or her parents) that they may need to look out for…..

Gifts

Most of us like to receive gifts and especially ones of high monetary value! However, if the royal baby was to receive a gift or a bequest from a non-US person (e.g. from Harry or from HRH Grandma Windsor) that exceeded a value of $100,000 during the year, then a form 3520 “Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts” would be required. Certain types of gifts (US property for example) can even generate a US tax charge for the donor!

Please also note, whilst the $100K yearly limit is per person, amounts gifted from non-US persons are aggregated if they are from the same family!

Kiddie Tax

The Kiddie Tax is a tax imposed on children’s investment and unearned income that exceeds an annually determined threshold. “Children” can include those under 18 or full-time students under 24.

Before 2018, The IRS taxed such income at the rate of the child’s guardian (this would have been at  Meghan’s effective US tax rate for the purpose of this article). However, the Tax Cuts and Jobs Act of 2017 changed this so that a child’s income tax rate, from 2018, will now be based on the more onerous tax rates for trusts.

The rate of income tax will depend on the type of income and the amount generated during the year but the top rate of tax (at 37%) can apply on unearned income above quite a low threshold (just $12,500 for 2018). Annual US tax returns could therefore be required for the royal baby if he/she was to generate unearned investment income.

No doubt there will be plenty of more news in the run up to the birth of the new Royal and there will be much for Meghan and Harry to consider. Not least their child’s dual US/UK citizenship and the associated potential US tax issues but hopefully they will look to appoint a good US/UK tax advisor to provide assistance and tax advice as and when needed!