(Released on 12/21/14)
You may have heard in the news about Boris Johnson. He’s a flamboyant politician in the U.K. with an unruly mop of blonde hair. Recently he made news by publicly saying he absolutely won’t pay his U.S. taxes. And yes, he is the mayor of London (the “real” London, where Buckingham Palace is). (Mahalo to the Washington Post for much of the information about Boris.)
So what’s the deal here? Boris was born in New York, lived there until he was five, and then moved to the U.K. where he has lived the rest of his life, some fifty years. He sold his home in the U.K. and bought another one there. The U.K. does not tax capital gains on the sale of a taxpayer’s principal residence…but the U.S. does.
Although Boris physically left the U.S. and never moved back, he never gave up the U.S. citizenship he acquired at birth. A well-publicized spat with a U.S. immigration officer in 2006 then led him to declare, “After 42 happy years I am getting a divorce from America.” But the divorce apparently never materialized, for Boris renewed his U.S. passport in 2012.
The U.S. is only one of two countries in the world that classifies you as a resident for tax purposes if you live in the country or have citizenship. (Eritrea, which is in the Horn of Africa just east of Sudan, also imposes tax on expatriates, but their tax rate is 2%.) The U.S. actually might have gone a little further because lawful permanent residents, “green card” holders, are also classified as residents even if they don’t live in the U.S. The U.S. tax system then says that if you are a resident, you are taxed on your income wherever in the world it comes from, although you then can get a credit against that tax for the taxes legally imposed by other countries. The reason for this dates back to the Revenue Act of 1862, which called for taxing of U.S. citizens abroad, partially to get back at those who wanted to get out of the country instead of fighting in the U.S. Civil War. (When we recently wrote about Maryland, we observed that almost all state tax systems work in similar fashion, providing that a resident of the state is taxed on worldwide income, but that the state then yields a credit for income tax legally imposed by other jurisdictions. However, citizenship doesn’t factor into the equation.)
The underlying problem appears to be that the U.S. and the U.K. subsidize housing through the tax system in different ways. The U.K. doesn’t tax gains from the sale of a home. The U.S. allows for a deduction on the mortgage interest used to acquire it. It’s rare for both systems to be applied at the same time, but Boris’ case – dual citizenship – is the classic example where it does happen.
One solution for Boris is for him to complete his divorce from America. Nowadays, the pressure on citizens to disclose their foreign financial accounts, as well as the recent enactment of the Foreign Account Tax Compliance Act (FATCA), has prompted more of these. The Treasury Department in February announced that 2,999 Americans renounced their citizenship in 2013 – almost double the previous record set in 2011.
Perhaps Boris will get his justice indirectly. If he continues to stay in the U.K., the IRS can thrash around all it wants but it won’t be able to do anything. Under international law, a tax bill in one country generally can’t be enforced in any other country. So he would need to pull his assets out of this country, assuming that any are still here, and he would need to watch his step if he wants to visit Hawaii.
In any event, is Boris a victim of a whacked-out tax system or is he a scofflaw who deserves to be worked over? He certainly gives us something to think about.