Royal baby faces US tax dilemma: How Meghan Markle and her baby will be liable to pay IRS

Meghan Markle and Prince Harry wed on May 19, 2018, and less than a year later their firstborn is due to be born. Meghan gave up her career as an actress and life in the United States to move to the UK and marry Prince Harry - but it seems despite swapping countries, she may not have escaped the tough tax laws. The Duchess of Sussex is a US citizen and their citizenship-based tax system - Internal Revenue Service (IRS) - could prove to be a headache for the Royal Family. 

David Treitel, the founder of American Tax Returns Ltd., which provides taxation advice to US expats told CNN: "The United States has - unique among nations - a citizenship-based taxation (system), so as long as Meghan is a citizen of the United States she is taxed.” 

The law means US tax inspectors could delve into Harry and Meghan's royal wealth, and subsequently do the same for the income of their newborn child.

Mr Treitel explained: ”The baby is being born to a United States citizen and that baby, little boy or girl, who comes along in the next few weeks, will automatically be a citizen of the United States simply because her mother is.

"There is no other precedent of anybody else in the Royal Family who's been American. So nobody else has ever faced this circumstance before."

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Despite her new home in Frogmore Cottage, Windsor, England Meghan will have to file a US tax return and report certain things to the IRS. 

These include any foreign accounts, assets worth more than $200,000 and any gifts which are worth more than $15,797 "regardless of whether it is actually in your possession," according to the IRS.

Such items the Duchess may have to disclose to the IRS include her wedding ring made from Welsh gold from the Royal Collection gifted by the Queen, and the diamond in her engagement ring which was taken from Princess Diana’s jewellery collection. 

Meghan may also have to declare the wedding presents gifted by her A-list friends and even the Sussex’s newly renovated multi-million pound home, Frogmore Cottage. 

However, this may not be straightforward as Mr Treitel explained: “The Queen has got to sit there and her advisers have to sit there thinking: well if I lend Meghan a tiara if I have the baby use a beautiful silver rattle that was used by Queen Victoria, how much is that worth? 

"What's the value of it? How much is to be reported to the States? It's a tough question, it's not easy.”

Alongside the declaration of gifts, should the Duchess decide to sell them she would be taxed on their increase in value - and with her famous name associated with the items, the cost of them could massively increase. 

Mr Treitel believes Harry and Meghan will be well aware of potential tax issues “long before they were married, when they were dating, just in case a baby came along because they knew if they had a child the baby would be American.”

To avoid the tax headache, Meghan could renounce her US citizenship and become a British citizen. 

However, her baby would still be liable to pay US taxes until he or she turns 18 and has the chance to renounce their US citizenship.

According to the US Department of State, when it comes to a royal baby, he or she will be granted US citizenship as they were born in wedlock to an American citizen, who themselves lived in the US for a period of five years - at least two of which were after the age of 14. 

Throughout Baby Sussex’s life, he or she will have assets and income assessed by the IRS - which includes any “unearned income” of more than $2,100 until the age of 18 when they are able to renounce their US citizenship should they so wish. 

Mr Treitel says as soon as the royal baby is born, he or she will inherit investments which will then generate income - reportable and taxable in the United States. 

He explained: "One would expect because the Queen comes from a wealthy family, Diana came from a wealthy family, we would expect that they've put aside some investments for future generations, presumably to future unnamed children and grandchildren and so on.”

As well as this, any trust fund that Baby Sussex will receive - which the Royal Family use to pass money down the royal line - would fit the IRS description of a foreign trust and can be taxed in the US. 

So, royal accountants for the Sussex’s will have a lot of paperwork to go through when the royal baby arrives.