19 March 2019 - Article
Are your children US citizens? If you’ve not ordered a giant turkey for your family this November and have never made your children a PB&J sandwich you might not think they are, but Uncle Sam (and therefore the IRS) may not agree. This is significant, as US citizens are liable to US federal tax and reporting requirements. In particular, US citizens are liable to US federal income and transfer tax on their worldwide assets by virtue of their US citizenship status and regardless of whether they are tax resident in another country. So who is a US citizen? Pursuant to the 14th Amendment of the US Constitution and the Immigration and Nationality Act (‘INA’), US citizenship is granted automatically to any person born within and subject to the jurisdiction of the US (known as the doctrine of jus soli). Individuals born outside the US to a US citizen parent are similarly granted US citizenship automatically if certain requirements are met (known as the doctrine of jus sanguinis).
Though many think they are familiar with the rules of acquiring US citizenship, this complex area of law often prompts questions when it comes to who is liable to US federal tax and reporting requirements. Here are a few of the questions that arise regularly:
Question: My children were born in the United States but my spouse and I are not US citizens (and have never been.) We moved back to England when the children were very young. They have never lived in the US since we moved back to England, and they do not have US passports. Are my children really US citizens?
Answer: Yes. Because your children were born in the US and were subject to its jurisdiction when they were born, they are US citizens under section 301(a) of the INA. Their US citizenship status was not extinguished when your family moved back to England, and their status as US citizens is not affected by the fact that they have not resided in the US since.
They are not required to apply for a US passport, though they must use a US passport if they are traveling to or through the US.
Question: I am a US citizen, and my spouse and I live in London. We have had two children together while living in London. Are my children US citizens?
Answer: Your children may be US citizens; the answer to this question will depend on whether you (and your spouse if you are both US citizens) satisfy certain physical presence requirements in the US.
If you and your spouse are both US citizens: Under INA section 301( c ), if either one of you has ever resided in the US (or one of its outlying possessions ) prior to the birth of your children, then your children automatically acquired US citizenship at birth.
If you are a US citizen but your spouse is a foreign national: Under INA section 301(g), if you were physically present in the US for at least five years, including at least two years after you were 14 years old, then your children acquired US citizenship at birth.
Question: I am an unmarried US citizen living in London. I have children who were born in England, and my children’s other parent is not a US citizen. Are my children US citizens?
Answer: Your children may be US citizens. The rules relating to your children’s US citizenship status are a bit more complicated than if you were married and have been the subject of recent case law.
If you are the father: INA section 309(a) sets out the evidence required for you to establish your relationship with your children. This includes establishing a blood relationship with your children by clear and convincing evidence, agreeing in writing to provide financial support for your children until they turn 18, and taking certain steps to acknowledge your paternity before your children turn 18. If the requirements in INA section 309(a) are satisfied, INA section 301 then applies to you as it would if you were married to your children’s mother. Therefore, under INA section 301(g), if you were physically present in the US prior to the birth of each child for at least five years, including two years after you were 14 years old, then your children acquired US citizenship at birth.
If you are the mother : The rules that determine whether your children acquired US citizenship at birth vary depending on when your children were born. If your children were born before 12 June, 2017, under INA section 309( c ) your children acquired US citizenship at birth if, you were physically present in the US (or one of its outlying possessions) for one continuous year prior to the birth of each child.
However, the US Supreme Court held in Sessions v. Morales-Santana that the five years of physical presence (two of which are were after the age of 14) requirement should apply prospectively to all cases involving a child born out of wedlock and outside of the US to one US citizen parent and one foreign national parent, regardless of the gender of the US citizen parent. In light of this decision, if your children were born on or after 12 June, 2017, your children will have acquired US citizenship at birth if you satisfy the five year physical presence requirement under INA section 301(g).
Question: But I never registered my children’s birth with the US Embassy, and my children have never been to the US. Does that matter?
Answer: No – they are still US citizens if they acquired citizenship at birth. For children born outside the US who acquire citizenship at birth, their citizenship is automatic and is not dependent on registration or obtaining a certificate. You may register your children’s birth abroad and obtain US passport for them, or they may do so themselves by applying for a Certificate of Citizenship if they are over the age of 18, if they wish to do so.
Your children do not need to be physically present the US, or take any action, to retain their US citizenship. Prior to changes made to the INA in 1978, individuals who had acquired US citizenship by birth outside of the US to one US citizen parent had to meet certain physical presence requirements to retain their citizenship. The 1978 legislation eliminated ‘retention requirements’ for individuals who were born after 10 October, 1952, so your children’s automatic US citizenship will not be ‘lost’ just because they have never been physically present in the US.
The many benefits of US citizenship are coupled, unfortunately, with a significant compliance burden. US citizens must satisfy their obligations to file annual US federal income tax returns and pay US federal income tax, regardless of where the individual lives, earns income or holds assets. Additionally, US citizens are subject to US federal gift tax on worldwide gifts of their assets and US federal estate tax on their worldwide estate. For both taxes, the rate is 40% on transfers exceeding the unified lifetime exemption amount of $10 million (indexed for inflation at $11.18 in 2018).
In addition to filing US federal income tax returns and related forms, US citizens are required to file Financial Crimes Enforcement Network Form 114, referred to as a Foreign Bank Account Report (‘FBAR’) to report all foreign bank and financial assets if the total value in all accounts exceeds $10,000 at any point during the calendar year being reported. Accounts owned by trusts, corporations, partnerships and other entities may be subject to reporting if, in general, the US citizen’s interest exceeds 50 percent. A failure to file carries severe civil and potentially criminal penalties – as high as 50 percent of the total account value if the failure is deemed wilful. Moreover, burdensome US and international compliance and ‘know-your-customer’ rules provide a significant hurdle to standard banking activities of US citizens living outside the US.
Just who is a US citizen can be a complicated and heavily fact dependent matter. Asking the right questions, for yourself and for your children, is critical, as the taxation of US citizens abroad impacts thousands of individuals, many of whom do not know they are US citizens.