Personal Finance

Meghan and Harry can flee to Canada but they will still owe taxes in the US

Key Points
  • Prince Harry and Meghan Markle announced they would step back as senior members of the royal family. The couple wants to work toward being financially independent and won’t receive public funds for royal duties.
  • Regardless of where the Duke and Duchess of Sussex reside, Markle will continue to face U.S. taxes on worldwide income if she maintains her American citizenship.
  • In addition to filing U.S. tax returns, Markle may also have disclosure requirements if she holds foreign bank accounts.
Prince Harry, Duke of Sussex, and Meghan, Duchess of Sussex, leave Canada House on January 7, 2020, in London, England. (Photo by Samir Hussein/WireImage)
Samir Hussein | WireImage | Getty Images

Prince Harry and Meghan Markle are getting closer to severing financial ties with the Royal Family, but there's one entity that will always be part of the picture: the IRS.

The Duke and Duchess of Sussex announced earlier this month that they would "step back" as senior members of the royal family and work toward becoming financially independent.

The family has a residence in Frogmore Cottage, part of Windsor Castle in the United Kingdom, and they are currently on Vancouver Island in Canada.

Here's a breakdown of Prince Harry and Meghan Markle's current income
Here's a breakdown of Prince Harry and Meghan Markle's current income

Regardless of where the family winds up settling, one thing is for certain: Meghan is still required to file and pay U.S. taxes as an American citizen — and so will the couple's son, Archie.

Royal status notwithstanding, the Duchess and her child are in the same situation as roughly 9 million Americans who are residing in foreign nations.

"Whether they're settling in the United Kingdom or in Canada, the situation isn't going to change for Meghan; she is a U.S. citizen," said Gideon Rothschild, a partner at Moses & Singer in New York. "She files a return every year and pays taxes on worldwide income."

Income taxes

Greg Blomberg | EyeEm | Getty Images

The United States taxes its citizens regardless of where they reside and where they earn their income.

"Once they work their way into financial independence, more will change with their tax situation," said Lisa Greene-Lewis, CPA and editor with TurboTax Blog.

For starters, whether the couple earns income from sponsored posts on Instagram or from merchandise sold under their Sussex Royal trademark, Meghan will have to report self-employment income from those deals.

She'll also have to pay the self-employment tax of 15.3%, a levy that covers Social Security and Medicare taxes.

Britain's Prince Harry and Meghan Markle stepping back from 'senior' roles in royal family
Prince Harry and Meghan Markle stepping back from 'senior' roles

Meghan may also be on the hook for the additional Medicare tax, which applies to taxpayers who earn at least $200,000 if they're single filers ($250,000 if married filing jointly or $125,000 if they're married and filing separately).

A special provision in the U.S. tax code allows citizens abroad to exclude some of the income they earn from their U.S. taxes. This is called the foreign earned income exclusion, and it's $105,900 for the 2019 tax year.

The Duchess of Sussex isn't the only one with obligations to the IRS.

Dual-citizen baby Archie will face tax reporting requirements for large gifts received from the Queen and income earned.

"The baby could have a filing requirement if he's getting money from the royal family, while payments for public appearances could be deemed income and taxable in the U.S.," said David McKeegan, co-founder of Greenback Expat Tax Services.

Filing status

The Internal Revenue Service's offices in Washington, D.C.
Adam Jeffery | CNBC

While the couple may be living in wedded bliss, the Duchess will likely submit her income tax return as "married filing separately." This would mean she files her own return and is responsible for her own tax liability.

"The alternative is that they would be married and filing jointly, and that would subject Harry to the U.S. tax rules," said Suzanne Shier, chief tax strategist at Northern Trust.

That would mean the prince would be subject to U.S. income tax filing requirements, as well as foreign bank account reporting requirements, she said.

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Deciding on filing status comes down to the pros and cons.

In 2020, the standard deduction is $12,400 for couples filing separately, versus $24,800 for joint filers. Separate filers also miss out on a range of tax breaks, including the child and dependent care credit and the student loan interest deduction.

"You do have to give up some things, but you decide based on strict dollars and cents, as well as tax compliance and reporting considerations," said Shier.

Rules of reporting

Meghan Markle pictured on March 23, 2018
Charles McQuillan | Getty Images

While she was working on her TV series "Suits," Markle, a former actress, resided in Toronto.

Money she holds in accounts in Canada or in the U.K. may be subject to the "report of foreign bank and financial accounts," or FBAR.

The Duchess must file this report each year by April 15, but she — and any other Americans — gets an automatic extension until Oct. 15 if she misses the earlier deadline.

Americans are required to turn in a FBAR to the Treasury's Financial Crimes Enforcement Network if they had an interest in or signature authority over at least one account outside the U.S. and the aggregate value of all the foreign accounts exceeded $10,000 at any time in the year.

She may also need to turn in a statement of specified foreign financial assetsForm 8938 — with the IRS when she files her income tax return on April 15.

Baby Archie will also be subject to the same reporting requirements, at least until he's old enough to relinquish his citizenship and pay the exit tax.

"You're not allowed to renounce your citizenship until you're 18," said McKeegan. "Your parents can't do it for you."