Royal baby Archie faces a complicated tax situation

Personal finance

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It’s official: Baby Sussex has greeted the world and the royal family. And he will eventually have to say hello to Uncle Sam.

The first child of the Duke and Duchess of Sussex — Archie Harrison Mountbatten-Windsor — made his world debut on Monday and his first public appearance on Wednesday.

Because the baby was born to an American mother, that also makes him an American citizen.

And being an American — regardless of where you live in the world — also comes with a tax bill because the U.S. is one of the few countries that tax people on citizenship, not residency.

For young Archie, that will mean a unique situation — and possibly a key decision when he’s old enough as to whether or not to keep his American citizenship.

Stringent rules

For babies born outside of the United States, one parent has to be an American citizen. But there are other requirements. The American parent has to have lived in the U.S. or one of its territories for at least five years before the baby’s birth. At least two of those years have to have been after age 14.

Archie, like all Americans abroad, will be required to disclose income and assets of a certain level to the IRS.

That holds if individually he has at least $12,000 in income, or more than $400 in self-employed income, according to David McKeegan, co-founder of Greenback Expat Tax Services.

Under U.S. rules, he will also have to disclose if he receives gifts of cash or stock or has assets over $10,000. The Foreign Account Tax Compliance Act also requires foreign institutions to disclose information on U.S. citizens’ accounts.

“It will really depend on how the baby earns money or how money is given to the child what kind of tax reporting situation it would have,” McKeegan said.

The royal family may have already taken steps to address this situation.

“They probably have already set up trusts that keep the assets out of the child’s name,” said Dean Hedeker, principal of Hedeker Wealth.

However, Archie will still have to disclose to the IRS the income he receives from foreign trusts, Hedeker said.

Gifts may also have to be disclosed. If the queen gave the child cash or another present worth more than $100,000, that would have to be reported to the IRS.

Big decision

As Archie, who does not have a royal title, grows older and his financial situation gets more complicated, he could face additional costs.

If he sells his primary home in the U.K., that is not taxed in that country. But that same transaction would be subject to levies by the U.S.

One thing that could work in his favor is foreign tax credits, which give you credit for the foreign taxes paid on worldwide income.

If the taxes in the U.K. are higher, that could offset what he owes to the United States. “Assuming the U.S. rate is lower, it’s just going to be an exercise in shuffling paper,” Hedeker said.

But he will face a lifelong commitment to filing with the IRS. And the penalties can be steep if you neglect to file.

If those requirements become too cumbersome or the tax costs too expensive, Archie could decide to renounce his citizenship, like more Americans living abroad are doing.

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He will have to be at least 16 to make that decision, according to the State Department.

If he does renounce, he will pay a fee, which is currently $2,350.

He will also face an exit tax on all of the assets he owns on the day of expatriation.

“The value of [his] U.S. passport would have to be such that it’s more valuable than the trouble it takes to remain compliant,” said attorney Doug Andre, partner at Ivins, Phillips & Barker.

For the royal baby, dual citizenship may be just an inconvenience. But for ordinary individuals living overseas, the financial consequences can be severe.

“Keeping a U.S. passport has a cost, especially if you don’t live here and travel frequently,” Andre said. “The cost may be prohibitive for some people.”

That has some expatriates hoping that this high-profile birth will help prompt change to the onerous tax rules for Americans living abroad, McKeegan said.

“It’s unlikely that U.K. government wants the person who’s seventh in line from the throne to be hit with taxes from the IRS,” McKeegan said.

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