Ok, I thought since there has been so much discussion of the tax and reporting implications related to Meghan's US citizenship, I'd create a post explaining some of the basic concepts so there isn't so much confusion.
There are some things I need to point out first:
1. My comments are for casual discussion only, and does not constitute professional advice.
2. I don't know, nor do I claim to know, how the BRF organizes their finances. There are some basic assumptions that I'm using based on what I've read over time on royal expenses. If there is any assumptions that contradicts what any of the royal experts here know, let me know and I'll adjust my comments as necessary.
3. I am not familiar with UK tax law. My comments aren't intended to take into account of UK laws, but rather what Meghan's obligation to IRS is as a US citizen living abroad.
4. Tax laws are filled with loopholes, especially in international tax laws as they can cross several jurisdictions. Creating tax structures to avoid tax is as much of an art as it is science. As the tax liability increases, more complicated tax structure becomes more attractive. Tax avoidance is neither illegal or immoral.
5. Meghan's situation is obviously unprecedented. There is not going to be a case to look at as an exact replica of what she would be facing. However, there are ways to determine certain aspect of her situation and how IRS would view it.
6. Given her unique situation and high public scrutiny, it's unlikely that we would ever see her in court with IRS to fight a decision. Her attorneys and accountants are likely to take the more conservative route. If there is ever a situation that they can't be highly certain of a position they take, they'd like reach out to IRS to obtain a private letter ruling prior to the filing deadline to avoid any sort of public scandal. While IRS audits are private and will not be disclosed, if they ever went to court, it'd be public records.
Ok, now onto the fun stuff. There two things we have to differentiate first. The first is the difference between gifts and income. Gifts are given without receiving some kind of consideration in exchange. For example, wedding gifts are gifts. Income is when something (monetary or in kind) is given for providing a service or goods. The second thing is the difference between income tax return and reporting return. Income tax return is used to report income and offsetting expenses and may incur a tax liability. Reporting returns do not incur tax liability, it is for reporting of foreign assets US citizens either hold or have authority over. This type of return does not incur income tax liability, but they carry steep penalties if proper disclosures are not made. For failure to report a foreign account, the penalty is 10% of highest value in the account during the year. For example, if the account has $100k, reporting it on the FinCen 114 form incurs no liability. However, if the filer fails to report it, the penalty would be $10k.
Let's talk about gifts first. There will NOT be tax liability on Meghan for any gifts given. Period. Full stop. The reason is tax liability is incurred on the part of the person giving the gift, not the person receiving gift. For example, if my mom gives me $50k, anything over $15k may be subject to tax for her, not me, after a calculation of various things that we won't get into here. However, if the person gives the gift is a foreigner, that changes everything. IRS can't tax someone that's not in their jurisdiction. However, if Meghan receives gift over a certain value set forth by IRS, she will have to file a reporting return disclosing the assets and its monetary values. Some of you might remember incidents like Oprah giving away a car and those recipients incurring tax liabilities and think how am I right on this. It's all in how it's structured. For tax purposes, Oprah's giveaways are considered to be winnings and thus income.
Now onto income. In my opinion, any money Meghan gets for her wardrobe and such as part of royal duties will incur any tax liability based on my understanding that wardrobe for royal duties are intended for their use on the job and not personally. It's even possible that all the wardrobe expenses are passed through the office and thus not even go through their personal accounts. Even if you were to report it as income, the same amount would be expenses and it's a wash. It zeros out. Just like how Prince Charles takes the expenses he pays for the Cambridges and Harry's office and takes that as deduction on his taxes. Or at least, I read that he takes them as expenses. Now one concern is the rent free apartment Meghan and Harry receives at KP. There is a way to figure out the fair value of the rent as KP rents out apartments to other residents like the Prince and Princess Michael of Kent. Once it combined with any other income she has in UK (excluding investment income) exceeds the limits allowed by IRS, she would be required to file income tax return and report her foreign income and take tax credit for any foreign income taxes paid.
In terms of reporting, she will be required to disclose any foreign account that she has her name on, has a financial interest in, and has signature authority over. I know this is a concern for many and it feels like IRS just wants to get into people's personal business, but this is originally designed to prevent and discourage hiding assets in foreign accounts for tax evasion or money laundering or any other illegal purposes. This is the form that would incur tax penalty for failure to report. The previous mention gift disclosure return would also incur tax penalties if not properly reported.
In my experience, even if the tax liabilities don't turn out to be significant after it's all said and done, preparation cost for these returns are hefty. I'm not sure what the income tax rate is in UK, but in some countries like Singapore or Dubai, where there is no or very little (1%) income tax, expats tend to turn in their US passport for income tax purposes. However, expats living in other countries with high tax rate also would turn in their passports to avoid the filing requirements. Given Meghan's role, I do expect that she'll renounce her US citizenship. Avoiding the tax filings is definitely an added bonus. But of course, they could always surprise us.
That's all I have for now. If I think of anything else that I think is relevant to this situation, I'll add. Hopefully, having all of this consolidated and in the context of Meghan's situation helps clear up some confusion. I've seen some article from reputable sources that doesn't exactly tell the whole story because it's not concise. Like I said earlier, tax structure and international tax can be as much art as science, and because of this, being concise about which specific issue we are address with which tax return is important. While it doesn't seem like there is a lot of maneuvering going on based on what I just posted, it can get a lot more complicated and thus like an art.
