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What to expat when you're expecting.

Congratulations to the Duke and Duchess of Sussex on the birth of their baby boy. As first time parents we offer some advice as they take up the responsibilities of parenthood. This includes additional responsibilities with Uncle Sam.

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scullionm@buzzacott.co.uk

5 top tips for first time parents of a US child – from an expatriate tax expert and proud father.

 1.  Getting to know your baby.

You’re no doubt familiar with the hundreds of websites, books, videos and podcasts, all providing ample advice about how best to bond with your newborn. In addition to deciding what works for you on that front you will also want to know whether your baby is automatically a US citizen or not. Immigration laws have changed over the years so it is important to get the latest immigration advice to confirm a child’s US immigration status. Under current laws you are automatically a US citizen if you are born in the US. In most cases, and under current law, a US citizen parent will mean the child is automatically a US citizen. There are a few factors that influence US citizenship, including if the child is born outside of the US, has only one US citizen parent, and whether the US citizen parent has lived in the US for a sufficient number of years during adulthood. If a child is automatically a US citizen, then their parents will need to be aware of the US tax obligations that they could face.

 2. Supporting your baby.

The first few weeks after the birth will be a blur of getting to grips with everything from feeding schedules to sleep patterns through to the joy of analysis of poop. But of course your parental support does not end for many years and it is likely that you will have dependent children until potentially 23 years old. Whether your child has to file a US tax return generally depends on their earned and unearned income and whether they marry. Regardless of age, children who could be claimed as dependents must file if any of these conditions are met:

  • Investment (unearned) income > $1,050
  • Earned income > $12,000
  • Self-employed net earnings > $400
  • Earned and unearned total income that > larger of $1,050 or earned income plus $350.

Two ways children can file:

  • Form 8814 attached to parent’s return (if various condition met)
  • File their own return 

Tax Rates for children filing their own return:

The Tax Cuts and Jobs Act means all net unearned income over the threshold of $2,100 will be taxed using the brackets and rates for trusts and estates (see below for rates). The tax is calculated on form 8615, although this form no longer requires information from the parent’s tax return.

Tax Rate

  • up to $2,550 = 10%
  • $2,551 to $9,150 = 24%
  • $9,151 to $12,500 = 35%
  • all over $12,501 = 37%

3. Registering your baby with the appropriate authorities.

You will want to register your baby with a GP as well as register your baby’s birth with the local registrar office within 42 days of birth. If your child is a US citizen you will also need to register the birth with the US Embassy and file for a Consular Report of Birth Abroad. It is also recommended to submit an application for your child’s US passport and social security number at the same time. 

Reporting requirements may not end there, children may also be subject to US foreign informational reporting requirements such as a Report of Foreign Bank and Financial Accounts (FBAR) on FinCEN Form. A US citizen must file an FBAR annually if they have a financial interest in at least one financial account located outside the US, if the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year.

 4. What if they are a trust fund baby?

It would be quite common for a US parent who marries into a wealthy UK family to have various structures in place for the benefit of children. This could include trust funds that could be there for the benefit of a new baby, who could be a US citizen. The trustees would need advice if there is a US beneficiary child as there might be some adverse US tax issues to consider. This could particularly start to become an issue when distributions are received indirectly, directly, or constructively (normally when school fees start to get paid). Investments within the trust structure would need to be reviewed, but an overall review of the structure would be recommended when a US beneficiary becomes involved.

5. Advice on sleep deprivation.

Welcome to the sleep deprivation society. To make the days a little easier draw on whatever support is available to you, be that midwives, family or, if you’re lucky, nannies or night nurses. Professional advisors are also here to help soothe any tax issues and make sure new parents have one less thing to keep them awake at night. US children need to comply with the US tax rules in the same way that an adult would. There is no minimum age to become a US taxpayer. The IRS has anti-avoidance provisions in place to ensure taxpayers cannot avoid tax by holding assets in their children’s names. US and UK taxpayers should be mindful of tax efficient planning beneficial in one country that can cause a tax issue in the other.

Buzzacott’s Expatriate Tax Services team of dual-qualified US and UK tax advisors can guide you in making decisions that work in both the short and long-term, while avoiding pitfalls and unexpected consequences.