Dianne Mehany Weighs in on Unintended U.S. Residency Issues as a Result of COVID-19
Caplin & Drysdale

Dianne Mehany Weighs in on Unintended U.S. Residency Issues as a Result of COVID-19

Date: 4/6/2020

Prince Harry and Meghan Markle have now transitioned to their new arrangement, after officially stepping back from their working royal roles on April 1—and they're beginning this new era in sunny Los Angeles, Meghan's hometown.

. . .

An easy shortcut, explains Dianne Mehany, a lawyer specializing in international tax planning, is to make sure not to spend more than 121 days a year in the U.S.

. . .

This argument is made a little more complicated given Harry's well-publicized decision to step back from his role as a senior royal—a move that could be seen as a "decisive split with the United Kingdom," notes Mehany. Still, he and Meghan have retained a residence in the U.K. (Frogmore Cottage in Windsor), and have repeatedly expressed a desire to support the Queen and the Commonwealth.

Mehany believes that especially in 2020, this could be Harry's out. "Honestly, if he's less than 183 days, I think that is very likely a strong argument," Mehany says, adding, "Someone who has spent very little time in Los Angeles until 2020—and was essentially trapped here because of the way the world has shut down—you have a compelling argument that you're not truly a resident of the United States." So, interestingly, the ongoing pandemic could help Harry's case.

But it would be hard to use this going forward. "If you try to claim it too many years in a row, at a certain point the IRS is going to say, 'No, you don't have a closer connection to another country, because you're routinely spending 6 months a year in the United States,'" Mehany says.

There is also the possibility of Harry pursuing a "tiebreak" position under the U.S.-UK treaty, which would allow someone who accidentally becomes a resident (in other words, oversteps the number of days allotted) to avoid U.S. income taxes. There is also a downside to claiming this: while Harry would avoid paying taxes, he'd still have to file a boatload of paperwork and disclosures. "You still have to file a myriad of information returns, disclosing your worldwide assets, disclosing your trust positions, disclosing your controlled foreign corporations, disclosing your foreign investments," Mehany says. And like claiming a closer connection to another country, the IRS is less likely to permit this each time it's claimed.

. . .

Harry and Meghan have made it clear that they plan to earn their own income—and if that income is made in the U.S., they'll have to pay taxes on it.

For example, even before the Sussexes moved to L.A., it was reported that Harry was paid for a speech in Miami. Unless it was to benefit a charity, that payment "would be considered personal services income and he would owe tax in the United States, regardless of whether he was a resident or a non-resident," Mehany says. "Because it would be termed what we call U.S.-sourced income."

For the full article, please visit Town & Country's website.

Related Professionals

Related Practice Area(s)

View our non-mobile site Menu