The new born son of the former Duchess of Sussex, Meghan Markle, and Prince Harry, Baby Sussex was seventh in line for the British throne. He is still considered a US citizen from birth, irrespective of any paperwork filed to formalise that status, even as his father is a British citizen. Like 180,000 other US citizens living in the UK, Archie Windsor is liable for US taxes upon having an income. US citizens, regardless of residential status, are taxed on global income since 1962, with the Revenue Act removing previously unlimited exclusion.
Due to double taxation agreements, most US citizens living in Europe actually do not owe US taxes, but pay tax experts over US$500 per year to realize this, which is a serious financial burden. Besides taxation, overseas Americans must report retirement funds, foreign bank accounts, and local checking accounts to the US Treasury Department if aggregate balances in all foreign bank accounts exceed US$10,000 with the 2010 FATCA legislation cracking down on tax evaders. Legislators target about 50,000 “big dogs” many residents of the US but hiding their fortunes abroad, and not the millions of US citizens living overseas. A recent US government study reveals FATCA shortcomings which need solutions.
The average American abroad
Eritrea is the only other country to tax citizens living abroad on worldwide income. Overseas American organisations, such as American Citizens Abroad (ACA), lobby for shifting to a residence-based tax system and a bill is likely to be re-introduced in Congress this year. Largely middle class Americans with an undergraduate university education, they are not the stereotyped wealthy Americans living abroad. A few are “expats”, sent by their employers to posts abroad, but a majority migrate voluntarily, integrating to varying degrees, but remain in touch with USA and vote in US elections. Their lives in Paris, London or Rome may be glamorous to most Americans, but the reality is a daily routine similar to middle-class Europeans, complicated by American tax- reporting mechanisms.
Reason to renounce citizenship
Why not renounce US citizenship? Apart from emotional ties, many are ineligible for citizenship of the countries they reside in, and children must wait till turning 18 to renounce citizenship. But enhanced FATCA reporting requirements and its repercussions have encouraged citizenship renunciations from 226 in 2008 to 5,411 in 2016 from overseas Americans. Key factors are the tax-filing complexity, and feeling disillusionment. An American woman living in UK, not wealthy, not a business owner, or even employed, without rental property income and household income less than US$99,000, revealed her 2011 US tax return was about 100 pages and revealed she owed US$ 0 in tax. The cost to reach this conclusion is huge.
Another American woman, living and working as an artist in France, expressed concerns about complexity expressed by others and renounced citizenship due to complicated tax filing obligations. This woman met her husband settled in France with a job he liked, and she decided to stay. Basically the same process occurs if you should marry someone from even another American state. Most overseas Americans belong to the middle class, who often moved to be with a partner and whose lives are now adversely affected by tax-reporting requirements. More high-profile cases such as the Meghan Markle or even Boris Johnson are exceptions, not the rule.