If Meghan Markle can't escape the IRS what makes you think you can?
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Meghan Markle and Prince Harry announced they would step back as senior members of the royal family this year, with the hopes of becoming financially independent. They plan to relocate to Canada.
While the couple’s financial situation is bound to change in 2020, one thing stays constant: The IRS. Markle is a U.S. citizen, and is still required to pay taxes no matter where she lives.
All U.S. citizens must pay taxes on their “worldwide income,” including those living abroad, said Lisa Greene-Lewis, certified public accountant and editor with TurboTax blog. The U.S. is one of few countries requiring taxes based on citizenship over residency.
“No matter what, you have to pay,” she said. “When you’re living abroad, you’re taxed on all of your income.”
This will include any income Markle makes now that she's independent of the royal family, including a £400,000 speaking fee from a JP Morgan event.
Markle will likely have to report any self-employment income she earned in 2019. She’ll also pay self-employment tax, which covers Medicare and Social Security, said Greene-Lewis.
Markle’s son, Archie, may also have to file taxes. The 8-month-old baby is considered a dual citizen and likely earns enough income from gifts and public appearances, to report his income, said Greene-Lewis. The minimum income to report is $12,200, according to the IRS.
Markle isn’t alone. Roughly 9 million U.S. citizens live overseas and must pay taxes if they are earning money.
Tax season can be a particularly stressful time for expats, especially if they are subject to double taxation — meaning they owe taxes both to the U.S and to their country of residence.
“There are some ways to avoid double taxation and ease your burden,” said Greene-Lewis.
Expats who live in another country a majority of the year can exclude some of their income from their U.S. taxes, known as the foreign earned income exclusion. The amount you can exclude is capped at $105,900 in 2019.
The IRS also offers a foreign tax credit, which expats can claim on overseas taxes imposed by your resident country. The credit reduces your taxable income and tax bill.
Any expat, including Markle, can renounce their citizenship to avoid the IRS in the future. Archie would have to wait until he turned 18 to relinquish his citizenship. Deciding to ditch the U.S. passport? Prepare to pay another tax — surprise! — on the way out (close to 30%, depending on your net worth).
So before you take a job overseas, think long and hard about the potential tax implications. We have a guide on how to handle your money before starting a job outside the U.S.
Citizens can attempt to avoid paying taxes, also known as tax evasion. It’s generally not recommended, as penalties are severe. In addition to paying whatever you owed in taxes, the IRS may additionally fine you up to $100,000. Tax evasion can also carry a prison sentence of up to five years.
Image: Nastia Kobzarenko
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