The High Tea on Tax Implications Before and After #Sussexit

With the announcement of Sussexit, you might find yourself wondering, among other things, if #Sussexit will mean a royal pain in the family’s taxes.

What are the 2019 and 2020 tax implications of #Sussexit? What are the tax implications for U.S. Citizens living abroad? What will the tax situation be in 2020 after #Sussexit? What would a baby’s tax situation look like if they have dual citizenship?

Wonder no further – we’re here to spill the high tea on royal taxes:

 What are the tax implications for U.S. Citizens living abroad?

U.S. Citizens are taxed on worldwide income. To avoid double taxation, the IRS allows for a few tax deductions, credits, and exclusions to offset some income. Taxpayers may be eligible to take the Foreign Earned Income Exclusion or the Foreign Tax Credit, and the Foreign Housing Exclusion.

• What is the Foreign Income Exclusion? If you meet certain requirements while living abroad, you may be able to exclude foreign earned income up to $105,900 for 2019. You have to meet the bona fide residence test or the physical presence test to qualify for the Foreign Earned Income Inclusion. To meet the bona fide residence test, you have to prove to the IRS that you have been a resident of the foreign country for an uninterrupted time period that includes the entire year and other factors reported on Form 2555. Under the physical presence test, you would need to be physically present in the foreign country for 330 of a 365-day period (days do not need to be consecutive).
• What is the Foreign Tax Credit? You can choose to claim the Foreign Income Tax Credit on Form 1116 instead of the Foreign Income Exclusion but not both. The Foreign Tax Credit is used to figure the amount of foreign tax paid or accrued and can be claimed as a Foreign Tax Credit, though you are not allowed the credit for foreign taxes if they were paid on earnings that were excluded from U.S. tax.
• What is the Foreign Housing Exclusion? You may be able to deduct part of your housing expenses or treat a limited amount of income used for housing as not taxable. 

 What are 2019 tax implications before Sussexit?

Senior Royals’ income has been covered by Sovereign Grant to be used for expenses and funded by tax-exempt revenues also provided to cover expenses.

No one knows their specific tax burden, but in general, Royals don’t usually pay taxes unless they chose to do so voluntarily, and they are not allowed to accept direct payments for anything while they are full-time representatives of the Royal family. Thus, although one spouse is a U.S. citizen, and U.S  citizens are taxed on worldwide income, the couple probably doesn’t have a ton of foreign income to claim. 

If a U.S. citizen has foreign bank accounts, they will be responsible for reporting financial interest by filing a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form 114 of all foreign bank accounts exceeding $10,000.

Although Senior Royals cannot receive direct payments for anything, if the spouse who is a U.S. citizen has other income from U.S sources, like from U.S. investments, she may need to file a U.S. tax return. There could also be some tax deductions and exclusions available to lower her taxes.

2019 Tax Deductions, Credit and Exclusions

• Baby Tax Dependent: If a baby has dual citizenship and is also an American citizen, the U.S. citizen parent who supports him may be able to claim him as a tax dependent on her taxes as long as he has a social security number or ITIN. However, her tax benefits may be limited even if the baby has a social security number since the Child Tax Credit is only available to parents with income up to $400,000 married filing jointly ($200,000 single or married filing separately).
• Foreign Earned Income Exclusion: If a U.S. citizen living abroad has to claim foreign income, she could possibly exclude some of her foreign earned income and deduct certain foreign housing amounts.
• Foreign Income Tax Credit: She may choose to claim the foreign income tax credit on Form 1116, which is used to figure the amount of foreign tax paid or accrued and can be claimed as a foreign tax credit. However, she wouldn’t be allowed the credit for foreign taxes if they were paid on earnings that were excluded from U.S. tax.
• Charitable Contribution Deduction: While contributions to foreign charities are not tax deductible on a U.S. tax return, there are special rules that may allow the tax deduction for charitable contributions if she donated to Canadian charities under U.S.-Canadian tax treaty.

What will the tax situation be in 2020 after #Sussexit?

• Filing Status: The couple may not be able to file a U.S. joint tax return unless the non-resident spouse chooses to be treated as a U.S. resident. In general, if a U.S. citizen is married to a non-resident of the U.S. the married couple cannot file a joint tax return.
• Taxable Income: Given one spouse will still be a U.S. citizen, her tax situation is generally the same whether she’s in the U.S. or abroad. She will also be taxed on her worldwide income, so she would have to claim her foreign earned income.
• Self-Employment Income: In the quest for financial freedom, she will be able to accept income directly and may receive some 1099 income for her independent work, so she will be taxed on her self-employment income and may be responsible for self-employment taxes.

What would a baby’s tax situation look like if they have dual citizenship?

If an infant earns money as a U.S. citizen, he may have to claim his income. Earned income he makes from wages or self-employment income would not be subject to kiddie tax, but instead if he has earned income from wages or self-employment income more than $12,400 in 2020 he would have to file a regular tax return. His unearned income (usually from investments) may be subject to kiddie tax. Under tax reform, a portion of a child’s unearned income would be taxed at trust and estate tax rates instead of the parents’ income tax rate, which in some cases could be higher than the parents’ income tax rates, however, the recently passed SECURE Act retroactively repeals the tax reform tax rate change and reinstates the pre-tax reform method of kiddie tax calculation which taxes at the parents’ tax rate.

Canadian tax laws in addition to U.S. tax laws will have to be considered when transitioning to financial independence.