Dear Meghan and Harry,
Meghan, I never thought I’d be writing for the third time in less than two years about taxes! As a reminder, my earlier letters were about your tax troubles and baby Archie’s, because you’re both U.S. citizens with foreign ties, assets and income.
Now I’m writing again and adding Harry, because his taxes are about to be a Really Big Deal.
I know tax issues may pale in comparison to the wrenching changes you two are making. In pursuit of a better life, you’re moving far from Harry’s birth family and country. And he’s giving up cherished military roles and titles—work that has defined him.
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That’s a lot to deal with, now and later. Still, you both need to think about taxes right now. They’re likely to be tougher than immigration issues, and avoiding tax quagmires often takes time and attention to detail. For example, tax rules may require you to log your location daily.
To help, I’ve talked to several tax specialists who counsel cross-border families.
What’s most important, they say, is where you two will be residents for tax purposes, especially Harry. For now he is the “monied” partner, with access to more assets, and he likely has more tax flexibility than Meghan because he isn’t a U.S. citizen.
Let me briefly explain tax residency, which doesn’t mean you’re a citizen of a country. Instead, it means you have a primary connection to a country and owe the full range of its taxes on domestic and foreign income, employment, estates, or whatever. Often a key factor is how much time you spend there, and it can be hard to end tax residency once you have it.
Some “tax nomads” may be able to avoid being tax-resident anywhere, but most people are tax-resident somewhere, especially if they have children.
The three obvious residency options for you are the U.K., Canada, and the U.S. Each presents problems, but the specialists urge Harry to keep his U.K. tax home for now.
That could be tricky. Many people establish U.K. tax residency by spending more than 183 days per year in the country, but it’s not clear that Harry will meet that threshold. If he doesn’t, he’ll have to meet other tests.
One big help would be having a permanent U.K. residence like your Frogmore Cottage home, says David Treitel, a London-based adviser licensed to prepare U.K. and U.S. tax returns.
“If he’s careful, I think Harry can keep his U.K. tax residency, at least for a while,” he adds.
Why not be a tax resident of Canada? It’s a Commonwealth country, you’re staying there now, and Meghan lived there while filming the TV show Suits. But you’ve had little time to do tax planning, and Canada requires tax-resident U.K. citizens to submit detailed reporting of foreign assets or risk huge penalties, says Dianne Mehany, an attorney with Caplin & Drysdale in Washington.
What really alarms the specialists, however, is the idea of Harry’s becoming a U.S. resident for taxes. News reports have said you two hope to have a home in Los Angeles as well.
“If I were advising Harry, I’d put an ankle bracelet on him to make sure he doesn’t stay too long in the U.S. and owe taxes as a resident,” says John Richardson, an attorney in Toronto.
Here’s why. The U.S. can require more extensive disclosure of foreign financial assets than Canada, perhaps including ones held by Prince Charles and the Queen. They might be appalled, but there are severe penalties for lapses. And the U.S. often imposes high taxes on foreign income like payouts from offshore trusts and investments—the type Harry is likely to have.
Also, foreigners can be U.S. tax residents if they spend more than about 120 days a year here, far fewer than the 183-day threshold in other countries. Spending even a minute in the U.S. can count as a day, says Ms. Mehany.
California has its own thorny residency rules. A foreigner can be a tax resident there even if he or she isn’t a U.S. tax resident, and the state’s taxes are among the highest in the nation.
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Are you dizzy yet? The good news is that Harry may have an out if you two want to live in the U.S. If he can get a U.S. diplomatic visa, lots of his tax issues could disappear, says Phil Hodgen, an attorney in Pasadena, although he might have to be careful about his business earnings.
Harry, maybe your special status in the U.K. already makes you eligible for such a visa. If not, maybe you could get something like it without family influence. Working for an international organization such as a United Nations-related group can provide similar status, although there may be conditions to fulfill.
“It’s a neat solution,” adds Mr. Treitel, who has seen such a visa solve tax problems for a foreigner living in the U.S.
Of course, residency is only the beginning of your tax problems. If you reach your goal of becoming financially independent of the royal family, there will be plenty more. Getting good advice to cope with them will cost a small fortune, and not getting it could cost a large one.
Once again, I wish you all the best. Good luck with these tough issues!
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