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Meghan Markle’s U.S. citizenship could cause tax headaches for British royal family

Britain's Prince Harry and Meghan Markle pose for the media Monday on the grounds of London's Kensington Palace. (Eddie Mulholland/Associated Press)

It may seem like a modern fairy tale, but the upcoming wedding of Britain's Prince Harry to American actress Meghan Markle will come with some mundane hurdles. Perhaps most inconveniently for the British royals, this transatlantic partnership could end up involving the United States' Internal Revenue Service.

Buckingham Palace announced Tuesday that Markle will become a British citizen after her wedding next year. Although some foreign politicians are required to give up their dual citizenship, there are no similar rules for British royals — and there already has been widespread speculation that the union of Prince Harry and Markle eventually could result in some British royal children wielding American passports.

But there's a big obstacle in the way: American tax laws. "U.S. citizens are subject to U.S. tax obligations regardless of their country of residence," Peter Spiro, a Temple University law professor and the author of “At Home in Two Countries: The Past and Future of Dual Citizenship," wrote in an email to The Washington Post. "A member of the royal family would be treated just like anyone else."

By contrast, if Prince Harry were to move to the United States to live with Markle, he would not be expected to file taxes in Britain. The United States' citizenship-based taxation system is unusual: Only Eritrea has a similar system. It's a relic of the Civil War and the Revenue Act of 1862, which called for the taxing of U.S. citizens abroad — in part to punish men who fled the country to avoid joining the military.

For Prince Harry, the issue isn't that he will suddenly end up paying U.S. income tax, but rather that Markle's American citizenship could open up the secretive finances of the royal family to outside scrutiny. If she remains a U.S. citizen, Markle will have to file her taxes to the IRS every year. And if she has more than $300,000 in assets at any point during the tax year — a likely scenario, given her successful acting career and her future husband — she will be expected to annually file a document called Form 8938 that will reveal the detail of these assets, which could include foreign trusts.

Britain’s Prince Harry and American actress Meghan Markle will be married on May 19, 2018. (Video: Joyce Lee/The Washington Post)

This sharing of financial information with the U.S. government would probably be undesirable for the royal family, which has long preferred that its finances remain opaque. David McClure, the author of the book "Royal Legacy: How the royal family have made, spent and passed on their wealth," said that British royals' finances have long been "impenetrable" to outsiders. "I’ve been truffling in the royal coffers for seven or eight years," said McClure, adding that no one really knows how wealthy the royals are. "I suspect the queen doesn’t know," he said.

At least some of the royal family's money is tied up in trusts and other holdings, McClure added. After the death of his mother, Princess Diana, Prince Harry received half of her £21.5 million ($28.5 million) estate, and he shares a £3.5 million ($4.8 million) annual allowance with his brother and his sister-in-law. It is possible that Prince Harry receives other money from other royal trusts, but the extent to which he does is not publicly known.

Although Markle's tax information would not become public once sent to the United States, it would leave the royal family open not only to IRS review but also the risk that the information could leak, said Dianne Mehany, a tax lawyer at Caplin & Drysdale. "It’s not outside the realm of possibility that a form filed by the wife of a royal would draw increased scrutiny," Mehany said. The royal family's labyrinthine fiscal arrangements were already partly exposed by the Paradise Papers leak earlier this month, which revealed that Queen Elizabeth's estate has invested money in offshore tax havens.

Royal children would complicated matters even further. "Parents cannot elect to have a child lose his or her U.S. citizenship, so the children will be U.S. citizens (and therefore, U.S. taxpayers) unless they decide to give it up when they reach the age of majority," said Kristin Konschnik, a lawyer with London-based Butler Snow law firm.

What Prince Harry and fiancee Meghan Markle have been doing since their engagement

Prince William, left, Meghan Markle and her fiance, Prince Harry, arrive to attend services commemorating Anzac Day at Westminster Abbey in London. Anzac stands for Australian and New Zealand Army Corps, and the holiday honors troops who died in military operations. (Frank Augstein/AP)

Ultimately, there is little precedent for an American marrying into the British royal family like this — the 1937 marriage of Wallis Simpson to King Edward VIII offers few ideas on how to handle modern tax systems. However, McClure noted that the royal family employs some of the country's best tax consultants. "They won’t be short of advice about how to overcome any problems as an American taxpayer becoming part of the family," McClure said.

"My guess is that she'll be pressured by the Royal family to renounce [her U.S. citizenship], even if she'd rather not," Spiro added.

In many ways, that solution may be the simplest. And if Markle does give up her citizenship, she won't be alone. Treasury Department data show that 5,411 people chose to expatriate in 2016 — a 26 percent year-over-year increase and potentially a historic high — and experts expect that number to keep rising because of the increasing tax burdens placed on U.S. citizens living abroad.

But even expatriation would carry risks for Markle. She would have to first wait to become a British citizen, a process that is expected to take years. She also would be subject to a potentially considerable exit tax. Finally, she would struggle to regain her citizenship if she ever wanted it back.

"If she did, it would be for keeps," Spiro said. "Those who renounce are treated as if they never had citizenship. To get it back, she would have to go through the ordinary naturalization process."

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Correction: A previous version of this article misstated the threshold in assets that would require Markle to file a Form 8938 while living abroad. It is $300,000 and not $150,000.