Taxes are a royal pain, even for royalty

At year-end, many people start thinking about their taxes. Can you get some extra write-offs before New Year's? Will that big fee come in at year-end? Can you perhaps nudge it toward 2018? This year-end, there is added tax-angst over the tax brew being concocted in Washington.

It all makes the normal planning at year-end even tougher. Then, it won't be long before IRS Forms 1099 start to arrive in January. That's when the real tax misery starts. And speaking of misery, an old adage suggests that it loves company.

And it turns out that even if you are rich and famous, you must constantly be alert for tax missteps. Even if you are royal. The feel-good nuptials of American actress Meghan Markle and British Prince Harry seem like a fairy tale. Leave it to complex U.S. tax laws to spoil it with tax problems.

Here, the taxes at stake could be huge. Buckingham Palace has announced that Markle will become a British citizen after marriage. Yet tax lawyers are the first to point out that Meghan Markle's U.S. citizenship could cause major tax headaches for Britain's royal family.

After all, unless she renounces her American citizenship, no matter where she lives, she'll have to file U.S. tax returns, plus FBARs, every year. If all her income is earned in the UK, that doesn't matter. She must still report her worldwide income to the IRS. Perhaps even worse, she must keep disclosing her non-U.S. assets too.

As a new member of the Royal Family, that could become a sticky wicket for Britain. One can just imagine that the IRS could be rubbings its hands just thinking about that tax audit. Many a dual country couple innocently starts filing U.S. taxes together, and that can be a very costly mistake.

Year in and year out, 95 percent of married couples file joint tax returns, often as a knee-jerk reaction. Yet that simple step makes each spouse liable for everything on the return -- and anything that might not be on the return. Markle will surely be advised to file taxes separately, so Prince Harry will hopefully not be caught within the U.S. tax net. But if they have children, what about all of them viz. the IRS?

It isn't just income that the IRS wants to know about. It's assets too, maybe even some royal ones. FATCA, the Foreign Account Tax Compliance Act, is a uniquely American law. It was passed in 2010, and is now ramped up worldwide. It requires an annual Form 8938 filing with the IRS that could end up involving royal assets.

FATCA spans the globe with an unparalleled network of reporting. America requires foreign banks and governments to hand over secret bank data about depositors. Non-U.S. banks and financial institutions around the world must reveal American account details or risk big penalties.

Perhaps Markle will follow London's former mayor, Boris Johnson, now Britain's foreign secretary. Having been born in New York but raised in Britain, Johnson was a dual citizen of the U.S. and U.K. But a feisty run-in with the IRS over a London home sale (tax-exempt in the U.K., but not the U.S.) eventually led him to renounce his American citizenship.

Renouncing citizenship is trending too. The number of renunciations for the first quarter of 2017 was 1,313. The second quarter's list went up to 1,759, the second highest quarterly number ever. The total for calendar 2016 was 5,411, while 2015 had 4,279 published expatriates. Despite the official list, many who leave are not counted, although both the IRS and FBI track Americans who renounce.

Expats have clamored for tax relief for years. Even if you are not royal, America's global income tax compliance and disclosure laws can be a burden, especially for U.S. persons living abroad. Many foreign banks do not want American account holders.

Americans living and working in foreign countries must generally report and pay tax where they live. But they must also continue to file taxes in the U.S., where reporting is based on their worldwide income. A foreign tax credit often does not eliminate double taxes. Annual foreign bank account reports called FBARs carry big civil and even criminal penalties. The civil penalties alone can consume the entire balance of an account. Ironically, even leaving America can be costly.

America charges $2,350 to hand in your passport, a fee that is more than twenty times the average of other high-income countries. The U.S. hiked the fee to renounce by 422 percent, as previously there was a $450 fee to renounce, and no fee to relinquish. Now, there is a $2,350 fee either way. The State Department said raising the fee was about demand and paperwork.

Maybe, but in any case, the number of American expatriations kept increasing. Moreover, to exit, one generally must prove five years of IRS tax compliance. And getting into IRS compliance can be expensive, and worrisome. For some, a reason to get into compliance is to renounce, which itself can be expensive.

The U.S. has an exit tax on renouncing. If you have a net worth greater than $2 million, or have average annual net income tax for the five previous years of $162,000 or more, you can pay an exit tax. It is a capital gain tax, calculated as if you sold your property when you left.

It isn't just for U.S. citizens. A long-term (eight-year) resident giving up a Green Card can be required to pay the exit tax too. Sometimes, planning and valuations can reduce or eliminate the tax, but the tax worry can be real, even for those who will not face it.

The Meghan Markle and Prince Harry marriage is still a nice story. But as with many nice stories, the IRS could be watching...