Baby Sussex, the newborn son of Meghan Markle, Duchess of Sussex, and Prince Harry, will be seventh in line for the British throne. He will also be considered a US citizen from birth by US authorities, regardless of whether paperwork is filed to formalise that status. And, like the other 180,000 US citizens living in the UK, Baby Sussex will be liable for US taxes as soon as he starts having an income.
US citizens, regardless of where they live, have been taxed on global income since 1962, when the Revenue Act removed the previously unlimited exclusion. While most US citizens living in the UK and other European countries do not actually owe taxes, thanks to double taxation agreements, research by Democrats Abroad shows that many need to pay tax experts more than US$500 per year to arrive at that conclusion, a serious financial burden for many.
Nor is taxation the only additional burden for overseas Americans. They must also report foreign bank accounts – including their local checking accounts and retirement funds – to the US Treasury Department if the aggregate balance of all foreign bank accounts exceeded US$10,000 at any point during the previous year, even for one day.
Most recently, the 2010 FATCA legislation sought to crack down on tax evaders. But legislators sought to target only the estimated 50,000 so-called “fat cats” (many resident in the US) hiding their fortunes abroad, and not the millions of middle-class US citizens living overseas.
FATCA requires both more extensive reporting by US citizens, and requires banks to report accounts or funds held by US citizens to the US government. And it has had substantial unintended consequences. Banks have closed accounts held by middle-class US citizens, leading to financial precarity for some and struggles to save for retirement. A recent US government study finds that FATCA has shortcomings, and advises finding solutions.
The average American abroad
Eritrea is the only other country to tax its citizens living abroad on worldwide income. This is a fact frequently drawn on in advocacy efforts undertaken by overseas American organisations, such as American Citizens Abroad (ACA), which lobby for a shift to a residence-based system of taxation. A bill which would do so is due to be reintroduced in Congress this year.
Baby Sussex will likely have the royal family’s accountants to handle the paperwork. But the vast majority of the other 180,000 US citizens in Britain do not have family accountants to help them. My research shows they are largely middle class, and, although most have achieved at least an undergraduate university education, they do not match the wealthy stereotype often associated with Americans abroad.
These Americans are primarily married to non-US citizens and have lived abroad for varying lengths of time, many for 20 years or more. While some Americans are “expats”, seconded by their employers to posts abroad, the majority migrate of their own accord. Like other migrants, they integrate to varying degrees, but often remain in touch with the US and vote in US elections.
While their lives in Paris, London or Rome may seem glamorous to those in the US, the reality for most is a daily routine remarkably similar to that of middle-class Europeans – just one complicated by the additional financial reporting mechanisms required by US authorities.
Reason to renounce citizenship
If this is such a challenge, some may ask, why don’t these Americans just renounce their US citizenship? Aside from the emotional ties mentioned by many in my research, many will not be eligible for citizenship of the countries they are resident in, and children have to wait until they turn 18 to renounce their citizenship.
But the increased reporting requirements of FATCA and its repercussions are seen as having a significant impact on the increase of citizenship renunciations – from 226 in 2008 to 5,411 in 2016, a substantial increase but still a small percentage of all overseas Americans. My research shows that key factors were the complexity of filing, as well as feelings of disillusionment. One US woman living in the UK, whose annual household income was between US$50,000 and US$99,000, told me:
My 2011 US tax return ran to nearly 100 pages (although I am neither wealthy, nor a business owner, nor even employed, nor do I have any rental property income) … the bottom line of my US tax return was that I owed US$0 in tax. The cost to me of reaching this conclusion had been huge.
Another woman, living in France and working as an artist, echoed the concerns about complexity expressed by others:
I renounced because the ever-more complicated tax filing obligations cost me stress and money and we can’t afford an international tax pro. I never owed any tax to the US, since when I was working I didn’t make enough.
I met my husband, he was settled here [in France] with a job he liked, I decided to stay. Basically it’s the same process that happens when you meet and marry someone from another (US) state.
Indeed, most overseas Americans are middle class people, who often moved to be with a partner and whose lives are disproportionately negatively affected by their tax reporting requirements. High-profile cases such as the Duchess of Sussex (or Boris Johnson) are the exception, not the rule.