Royal Engagement Tax Consequences, the State of State, and Tis’ the Season for Vulnerability Studies
Here’s What You Need To Know
With the announcement of Prince Harry’s engagement to American actress Meghan Markle, Anglophiles can look forward to another royal wedding taking place in Spring 2018. But while the spotlight will be on the happy couple, it will also shine a light on the unique tax consequences faced by Americans living abroad. The United States, along with the tiny African nation of Eritrea, are the only two countries in the world that tax based on citizenship rather than residency. The American system is a lasting relic of the Civil War-era Revenue Act of 1862, which called for taxing its citizens abroad, in part to punish those who fled the country to avoid wartime service.
The potential ramifications of this unusual system of taxation have resulted in transatlantic tax intrigue. So to celebrate the royal engagement, we’re digging into the Foreign Account Tax Compliance Act (FATCA), to whose consequences both the future Duchess of Sussex – and all Americans living abroad – are subject:
- What is FATCA? This law was passed in 2010 to help curb offshore tax evasion, and was a seemingly non-controversial “revenue-generator” in the depths of the recession. FATCA requires U.S. citizens to report any worldwide income, including that which results from foreign trusts, banks, and securities accounts. In order to do this, citizens and green-card holders are required to file paperwork, such as a Report of Foreign Bank and Financial Accounts (FBAR), if they have any foreign bank account that exceeds $10,000 at any point during the year. The Internal Revenue Service (IRS) also requires citizens with more than $300,000 in assets at any point during the year to file a separate document detailing them.
- What Are FATCA’s Implications? Besides the added paperwork burden, FATCA can make it difficult for American citizens living overseas because financial institutions used by Americans abroad must comply with IRS demands or face the consequences – which may include the IRS withholding 30% of non-compliant financial institutions’ U.S. sourced income. Rather than allow the American government invasive access to their records, foreign financial institutions may instead refuse to accept American customers, which in turn can hurt their chances of starting a business overseas or even getting promoted at their current job, should that position require banking access.
- What Does FATCA Mean For The Royal Family? Markle will have to file her taxes in the United States. This would give the IRS access to review information regarding any of the Royal Family’s finances held in accounts for which Markle is an account holder, and could result in increased scrutiny from the IRS towards, or risk leaked information about, the Royal Family’s finances – which they have preferred to keep opaque.
- Is There Relief For Americans Living Abroad On The Horizon? Not yet. Republicans discussed making changes to the tax burdens of Americans overseas as part of tax reform, but the packages that passed the House of Representatives and Senate include no changes to the current system. Interest groups that advocated for these changes, like American Citizens Abroad, have vowed to continue their work to repeal FATCA, noting an increased awareness on this issue – which has since been compounded by the pending royal nuptials.
Americans are renouncing citizenship at a record pace, a trend that has increased since FATCA was passed in 2010. Should the increased spotlight on this law resulting from the royal engagement ultimately lead to its repeal, Americans living overseas may owe a debt of gratitude not only to policymakers in Washington, D.C., but to the Duchess of Sussex.
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TIS’ THE SEASON FOR VULNERABILITY STUDIES
Santa is making his list, the Delve research bullpen is humming at full speed, and an iconic major league baseball franchise is crowdsourcing its managerial vetting process. Before selecting Aaron Boone as manager, the New York Yankees took an innovative approach to evaluating candidates, ditching the discretion typical of such interviews to instead conduct the vetting process in public before the media.
The reason for this process was twofold: to see how the managerial candidates handled the glare of the largest media contingent in baseball, and to allow the media to vet the candidate in the event they found something the team’s background search did not. This public-vetting process, juxtaposed with the reputational damage stemming from other notable cases, means that Santa is not the only one finding out who has been naughty and nice this holiday season.
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While some important positions remain unfilled, like Ambassador to South Korea and Assistant Secretary for East Asia, Tillerson has dismissed the notion that he is “hollowing out” the department, pointing to his signing of over 2,300 hiring exemptions to staff up on other critical positions under the hiring freeze that preceded his tenure. With the ranks of senior foreign service officers also at the same levels as they were at the beginning of the Obama Administration, the simplified-narrative that the State Department is being “hollowed out” appears to be overheated rhetoric.
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According to The Washington Post Fact Checker, that claim is worthy of numerous Pinocchio’s. The change is not a tax “break,” because the IRS has not collected money from the private jet companies, but rather the provision removes the ambiguity that has led to litigation in the past. So when opponents tweet the inaccurate claim that this bipartisan change provides a “private jet tax break,” perhaps they should delete their account, or at least apologize for accusing their fellow Democrat of siding with fat cats.
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