cross-posted from Quora
John Richardson
Toronto lawyer: FATCA U.S. tax + renunciation of citizenship
CitizenshipSolutions
John Richardson, Lawyer (1982-present)
Answered Mon
What if Meghan Markle’s child is born a U.S. citizen? Would the child have any immediate tax and information reporting requirements to the IRS?
I note that the question (1) assumes that Ms. Markle’s child is a U.S. citizen and (2) the question focuses on BOTH tax and reporting requirements.
Would Meghan Markle’s children be U.S. citizens?
The majority view is “YES” her children would automatically be U.S. citizens. My minority view is “NO” – they would have the right to be U.S. citizens but not the obligation to be U.S. citizens. I have previously explained my reasoning on Quora here:
John Richardson’s answer to Could Meghan Markle’s children apply for US citizenship?
But, assuming that her child will be born a U.S. citizen, then
To be perfectly clear:
With the exception of gifts/bequests received from a “covered expatriate” the recipient of a gift is NOT required to pay tax on the value of the gift.
The recipient of a gift or bequest may be subject to penalty laden reporting requirements. These reporting requirements apply even though the value of the gift is NOT subject to tax.
Furthermore, this answer is really a “thought experiment” which explores the absurdity of certain aspects of the Internal Revenue Code apply to the lives of Americans abroad.
Here we go …
Tax Requirements …
The obligation to file a tax return would depend on the amount of taxable income the child received and whether that income met the thresholds for filing. It is unlikely (but not impossible) that the child could meet the income thresholds. For information on thresholds (which also depend on filing category) see:
Do I Need to File a Tax Return?
Reporting Requirements (which may exist independently of the obligation to file a tax return)…
The reporting requirements can exist independently of whether a tax return is required to be filed. It depends on whether there are sufficient facts to trigger the basic reporting requirements.
The child is a recipient of support from Harry
The child is probably going to live life as a normal baby and will be both supported and cared for by his/her parents. It is reasonable to assume that the child will receive financial support from the Harry (the father) who is (from a U.S. perspective) an “alien” or at least a foreign person.
Should the food, housing, medical care, toys, etc. received from Harry be considered to be a “gift” from a “foreign person”? If the answer is YES and the value of the support exceeds $100,000.00 USD then the child has a reporting obligation to the IRS (whether the child files a tax return or not). This is made very clear by Section 6039F of the Bible Of American Life – The Internal Revenue Code. It reads:
26 U.S. Code § 6039F – Notice of large gifts received from foreign persons
26 U.S. Code § 6039F – Notice of large gifts received from foreign persons
(a) In general
If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year.
(b) Foreign gift
For purposes of this section, the term “foreign gift” means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).
(c) Penalty for failure to file information
(1) In generalIf a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)—
(A)
the tax consequences of the receipt of such gift shall be determined by the Secretary, and
(B)
such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).
(2) Reasonable cause exception
Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.
(d) Cost-of-living adjustment
In the case of any taxable year beginning after December 31, 1996, the $10,000 amount under subsection (a) shall be increased by an amount equal to the product of such amount and the cost-of-living adjustment for such taxable year under section 1(f)(3), except that subparagraph (A)(ii) thereof shall be applied by substituting “1995” for “2016”.
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
Note that the “cost of living adjustment” makes it clear that the threshold for reporting is now $100,000.00 USD.
The application of this rule is explained by the IRS here.
Gifts from Foreign Person
Further comments on the “foreign gift” rule …
Please note that to the extent that Meghan is the recipient of support from Harry and the Royal Family she is also required to report this support on Form 3520 (the information return where the gift is reported).
With respect to the Child – it might be better if Meghan (as a U.S. citizen) were to provide the support or if Harry never contributed more than $100,000.00 of support.
In any event, as in all “FBAR Marriages”, it would be wise for Harry and Meghan to keep VERY DETAILED records of the (1) the costs paid to support the child and (2) how much of that support comes from Harry (“the foreign person”).
No homeland American would have to worry about keeping records of the amount required to support their child because of IRS reporting requirements. But, if a U.S. citizen marries a “foreign person” (creating an “FBAR Marriage”), then there is a possibility of increased IRS reporting requirements.
Are the “foreign gifts” taxable as income to the child?
Generally no. Gifts are not generally taxable to the recipient.
But, there could be a problem if Meghan were to renounce U.S. citizenship as a “covered expatriate” and after renunciation provide financial support to the child. (If Meghan’s net worth exceeded $2 million USD when she renounced she would be a “covered expatriate”.)
S. 2801 of the Internal Revenue Code makes it clear that if the child were to receive gifts/bequests from a “covered expatriate” then the gift/bequest/support becomes taxable TO THE CHILD. This is explained in the following blog post:
Part 11 – S. 2801 of the Internal Revenue Code is NOT a S. 877A “Exit Tax”, but a punishment for the “sins of the father”
Therefore, it is important that IF Meghan renounces U.S. citizenship AND wants to provide support to her child that she first (prior to renunciation) give away enough of her assets so that she is no longer a “covered expatriate” (her net worth would need to be less than 2 million USD). Perhaps she could give the assets to the child in advance of renouncing U.S. citizenship. (Note that because the gifts came from Megan while she was still a U.S. citizen the gifts would not be from a “foreign person”.) But if she gives assets to the child in advance, she must be careful about creating a trust for the child which could conceivably generate more reporting requirements
Additional Reporting Requirements …
Trusts …
Internal Revenue Code Section 6048 imposes reporting requirements on the U.S. persons who receive property from “foreign trusts”.
26 U.S. Code § 6048 – Information with respect to certain foreign trusts
Note that IRS Form 3520 is used to provide the reporting in relation to both the “Foreign Gifts” and the “Foreign Trusts”.
Foreign Financial Assets …
Internal Revenue Code Section 6038D obliges U.S. persons to file reports on their foreign financial assets. See:
26 U.S. Code § 6038D – Information with respect to foreign financial assets
Basically if the child has “foreign financial assets” that exceed $200,000 USD AND the child is otherwise required to file a 1040 then the Form 8938 must be filed. Of course, the failure to file the Form 8938 will subject the child to more penalties. The instructions to Form 8938 are here:
https://www.irs.gov/pub/irs-pdf/…
Let’s not forget about Mr. FBAR …
Should the child have non-U.S. bank accounts, mutual funds or other investments that exceed $10,000 in value there may be an obligation to file an FBAR. In recent years, the IRS has made it very clear that – generally a child has the obligation to file his own FBAR!!! See the video in the following link.
Looking for Mr. FBAR? He’s Due October 15th! Learn the Latest…
And about “mutual funds” – let’s not forget Form 8621 (to report ownership of a PFIC”)
PFIC taxation and Americans abroad
Note that Form 8621 is required whether or not a 1040 is required.
In Conclusion …
It is essential that nobody rely on this as legal advice because I have not discussed a number of other possible reporting requirements.
A summary in the “form” (no pun intended) of Q and A …
Q. Will the IRS enforce these rules against Ms. Markle’s child?
A. Of course not. Babies (even U.S. citizen babies) are not born tax evaders.
Q. So, why I am providing such a detailed answer if the IRS wouldn’t enforce these rules against Ms. Markle’s baby?
A. To show you how insane the rules are that apply to U.S. citizens living outside the United States or who marry somebody who is not a U.S. citizen.
Q. What should U.S. citizens living outside the United States do?
A. Get rid of U.S. citizenship “quick time”.
Q. What should U.S. citizens who do NOT renounce U.S. citizenship do?
A. Report early! Report often! Report everything! – It’s the American way.
Q. Why are people getting rid of their US citizenship? A. It's because of the "10 Commandments of U.S. Citizenship" in a #FATCA and #FBAR world by John Richardson https://t.co/cbjEJ91Ijw
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) January 3, 2018
The IRS won’t enforce the rules against Meghan Markle and her child. But, they might enforce them against you.
Further reading (if you can stand the horror) …
IRS Form 3520, Penalties, and Whether to Make a Protective Filing – The CPA Journal
Norman Diamond:
“ in cases where Congress specifically named a person in a law granting citizenship, it probably wasn’t against their will.”
Exactly.
“ But they could if they wanted.”
Do you know how irrational that sounds?
An individual born outside the US to a US parent may be able to claim and make use of US citizenship. End of story.
“Don’t want to pay US tax? Renounce. Easy peasy. :-)”
Bullshit.
Not easy peasy for you, of course, given that you have only US citizenship and need to keep it until you’ve qualified for Japanese citizenship.
“None of the IGAs require banks to enquire into parentage, last I heard.”
Do any of the IGAs you know of require the reporting of all transactions, balance (regardless of amount) changes in balance, etc. ?
“Not easy peasy for you, of course, given that you have only US citizenship and need to keep it until you’ve qualified for Japanese citizenship.”
Yes, that first step to renouncing, another citizenship, is a doosie andI believe, not unique to Japan.
““ in cases where Congress specifically named a person in a law granting citizenship, it probably wasn’t against their will.”
Exactly.”
Except, as ND points out, Robert E. Lee’s remains had no say in the manner. Why would you presume the US Congress could vote to give citizenship to one group, those who want it, and not another group, those who do not?
Easy peasy, though, for a citizen of another country who is also has US citizenship and wants to renounce.
“Easy peasy, though, for a citizen of another country who is also has US citizenship and wants to renounce.”
Rich folk always think things that only have a cost factor to be “Easy peasy”.
So, now you have ignored not only those of us with just USCship but also those with another but who can not afford to renounce. Let’s see who else your overly broad statements can leave out.
Ooi Plaxy,
Are you aware of an IGA requiring the following “name, address, account number, tax identification number, accou t balance, interest income, etc, to the US tax authorities.” and/ or “name, address, TIN, transaction records (account balance, change in amounts, etc.)”?
“Rich folk always think things that only have a cost factor to be “Easy peasy”.
And when it comes to renouncing US citizenship, they’re right. It’s expensive. but easy.
“now you have ignored not only those of us with just USCship but also those with another but who can not afford to renounce”
On the contrary, individuals who want to renounce because of the IGA, but can’t renounce because they can’t pay the fee, have my sympathy. People who hang around bitching at me don’t.
You comments belie claimed sentiments.
Everything is easy to the rich.
Things are a bit different for those of us who are not rich.
Actually being rich isn’t easy. It’s a lot of work spending all that money. Consumes most of the day. Exhausting really.
Hehehehe.
All kidding aside, we stayed in the Plaza Hotel for a couple of nights on our honeymoon, the rest spent at motels. At every step there was someone holding their hand out for a tip. The porter who took our bags from the taxi (from the train station), the doorman who opened the outer doors to the hotel, the doorman who opened the inner doors, the porter who carried took the bags from the porter who carrued them up the steps to the outer doors to carry them into the hotel lobby, the bell hop who carried our bags to the room. When dinning there, a jacket is required, yet a jacket can not be worn in the dinning room. One must check their jacket in at the cloakroom, for a fee, and tip the attendant. not only is the waiter tipped, but also the head waiter. Going to the restroom, I was shocked to find a well dressed man standing by to turn on the faucet for me, offer me a towel and then present a silver tray upon which I was to place a tip. As expensive as staying and dinning there was, tipping was by far the greater expense. A once in a lifetime experience on MANY levels, I can asure you. Never one to envy those with more than I have, I actually began to pity the rich, if my experience at the Plaxy in NYC is in any way indictative of what they must put up with an a daily basis.
“Never one to envy those with more than I have, ”
🙂
“On the contrary, individuals who want to renounce because of the IGA, but can’t renounce because they can’t pay the fee, have my sympathy. People who hang around bitching at me don’t.”
No one told you to read a blog where people hang around bitching.
Best typo ever, Mr. T.
@plaxy
“On the contrary, individuals who want to renounce because of the IGA, but can’t renounce because they can’t pay the fee, have my sympathy. People who hang around bitching at me don’t.”
Personally, I don’tcare a damn what you think and would not bother with responding to most of what you post, except for the fact that people do come here looking for information and you paint a incomplete picture of the situation.
Not need nor want sympathy either. And as ND wrote, no one makes you come here.
@ND
“Best typo ever, Mr. T.”
Ohm hell, now what did I do?
@plaxy,
Since you keep bringing up what you are and are not aware of as reasons for actions you proscribe, I ask a third time, Are you aware of an IGA requiring the following “name, address, account number, tax identification number, accou t balance, interest income, etc, to the US tax authorities.” and/ or “name, address, TIN, transaction records (account balance, change in amounts, etc.)”?
“Never one to envy those with more than I have, I actually began to pity the rich, if my experience at the [best typo ever, Mr. T] in NYC is in any way indictative of what they must put up with an a daily basis.”
@ND,
OH How I Wish that was Not a typo! Ha‼️
Actually, it was probably that stupid predictive error function, either way, would have been so much more fun if I had intended it as it is.
Japan T:
“No one told you to read a blog where people hang around bitching.”
You’re the one I was referring to. I’ve learned something from most other commenters here, at one time or another.
It’s been an interesting turnaround. I was enraged when I found out about FATCA, but thanks largely to commenters here, and information and links that have been posted, I’ve come to the view that it’s the IGA signatory governments that should be held to account for putting citizens/residents in such an unfair position.
Maybe that will happen, maybe not. Shedding US citizenship does remedy the problem (as near as dammit), and if affordable, obtainable (e.g. an alternative citizenship exists) and desired (e.g. no need or desire to hang onto the little blue book) is in itself a benefit well worth the money for the simplicity it brings.
As for the US, if it wasn’t such a dangerous and unpleasant superstate I’d be almost inclined to feel a little sorry for it. All these valuable benefits it offers its citizens living outside the country – the right to hold a US passport allowing unqualified entry to US territory; the right to vote; the right to make use of the imminently useful US Tax Code on the same terms as US residents (with added benefits that US residents can only dream of); the right to pass on US citizenship to offspring — it all gets misinterpreted and reinterpreted and deconstructed and reconstructed and presented and re-presented as cruel and implacable oppression perpetrated out of an inexplicable hatred of expats.
That’s politics and the tax industry for you. 🙂
Leave the IRS alone and the IRS will leave (generic you) alone — though the same cannot be said for (generic your) country of residence, given that most countries have already signalled clearly that they care much, much more about their relations with the US than about US-related tax/banking problems of US citizens living within their borders.
Let us (generic us) hope the anti-IGA legal cases may dent the intergovernmental smuggery.
“You’re the one I was referring to. I’ve learned something from most other commenters here, at one time or another.”
Oh, I know.
Though I remain hopeful, I am less so with each passing day. It has been 6 years since I first stumbled across FATCA and CBT while applying to have my passport renewed. They would lead me to FBAR. In those 6 years, I have yet to see any real improvement, none, and have seen much real worsening of the situation.
All this talk of the relative value of various aspects of USCship is muted by the reality that for many, like myself, the negatives out weigh the positives by a large margin. What positives there are are for the most part out of reach for those of us under a certain income. For others, no amount of income can free them.
This concept of the IRS leaving you alone if you leave them alone is flawed as it is based on old data. Data from the time before FATCA. Too early to have usable data for after FATCA’s implementaion, but they didn’t dream it up and trick or force all nations to go along for no reason.
“… for … myself, the negatives of US citizenship out weigh the positives by a large margin. ”
Even though you’re relying on your US citizenship to be able to stay where you are or live anywhere else. 🙂