- Because of Meghan Markle's American citizenship, her baby will be liable for U.S. income tax.
- Children of American citizens are considered U.S. taxpayers no matter where in world they are born.
- Prince Harry and Meghan's child could avoid U.S. taxes when he or she turns 18 by renouncing their American citizenship.
Meghan Markle and Prince Harry won't be the only ones with theirlater this month — so will the royal tax accountants. Thanks to Markle's American citizenship, their firstborn child — who will be seventh in line to the British throne — will automatically become a U.S. citizen and thus be liable for federal income tax.
"When a child is born a U.S. citizen, they are a U.S. taxpayer irrespective of residency," international tax lawyer Stuart E. Horwich told CBS MoneyWatch. "The kid will have to list all foreign bank and financial accounts in which he or she has an interest," he said.
While Markle, also known as the Duchess of Sussex, can choose to renounce her American citizenship, her child would have to wait until he or she turns 18 before taking the same step.
This holds true for American citizens born anywhere in the world — not just to royal parents. In this case, however, the child's tax liability could open the royal bank accounts up to scrutiny by the Internal Revenue Service.
"This baby will have access to trusts and the use of a nice home in Windsor and other financial assets that the royal family has, so there is a lot of reporting that will need to be done," said David Treitel, founder of American Tax Returns, a tax advisory firm that helps clients prepare U.S. and U.K. tax returns. "The royal accountants will have a tough time learning U.S. tax rules and figuring out what they have to report."
That said, Horwich expects the royal family's financial advisers to take the necessary legal steps to both shield the child from U.S. tax obligations and ensure maximum financial privacy.
"I doubt anybody would be careless enough to create a situation where anything that was remotely sensitive would be releasable to the IRS," Horwich said, adding that failing to set up such basic protections for a prominent member of the Royal family "would be criminally stupid."
It's unclear how soon tax returns will be filed on the child's behalf, but the process could very well begin at birth. Notably, there is no historical precedent here — an American has never before been part of the British Royal family. Still, experts expect the couple to be well prepared for any potential entanglements with U.S. tax authorities.
"They are certainly going to be getting top-quality tax advice, and I would hope and am sure they are doing it all right, even though it's an unusual event for the British Royal family to be filing things with the IRS," California attorney Robert Wood said.