London Mayor Boris Johnson is not taking the bait. He refuses to pay a tax assessment that the IRS claims he owes. The Mayor was born in New York and holds a U.S. passport as well as a British one.
What brought this issue into the public spotlight? While visiting the U.S. last week to promote his new book, Mayor Johnson was interviewed by a reporter with National Public Radio (NPR). During that interview, he revealed that he had received a proposed assessment from the IRS for capital gains tax resulting from the sale of his primary home in the U.K. What makes this story so tantalizing is the fact that Mayor Johnson just recently criticized the U.S. embassy in London over its failure to pay the congestion tax. Hasn’t the mayor heard of the expression, “People who live in glass houses shouldn’t throw stones?”
A fundamental tenet of the U.S. tax system is that U.S. persons, citizens and residents alike, must pay U.S. taxes on their worldwide income. All U.S. persons, including those who have dual citizenship, must pay taxes to the U.S. government on their worldwide income, regardless of where it was earned. It doesn’t matter whether it was earned in Bangkok or Somoa, the U.S. taxes it.
When asked whether he would pay the tax, Mayor Johnson began backpedaling faster than Michael Phelps when he swims the backstroke. Not satisfied that the mayor had answered his question, the reporter pressed him for an answer. After regaining a little composure, the mayor soon replied, albeit a little tongue-tied:
“No is the answer. I think it’s absolutely outrageous. Why should I? I think, you know, I’m not a … I, you know, I haven’t lived in the United States for, you know, well, since I was five years-old … I pay the lion’s share of my tax, I pay my taxes to the full in the United Kingdom where I live and work.”
Unfortunately, no amount of outrage will spare the Mayor from paying this assessment. However, while his answer might have left a lot to be desired, that does not mean that the IRS will prevail in staving off a challenge. On the contrary, the IRS is on the losing side of this argument.
Why you ask? The U.S. and U.K have a tax treaty that is among the most generous in the world when it comes to mitigating the harmful effects of international double taxation for foreign residents. It does so by sparing U.K. resident-citizens who spend trifling amounts of time in the United States during the year from being classified as “U.S. residents” under the substantial presence test. And at a primitive level, that is the difference between whether such a person is liable for paying U.S. taxes or not.
Under Article 13 of the U.S.-U.K. tax treaty, Mayor Johnson is not liable for paying U.S. capital gains taxes on the sale of his home. Of course, that does not mean that he gets off “scot-free.” On the contrary, he must still pay taxes on the sale, but only to the U.K. government. Therefore, the mayor seems to have a ironclad argument for overturning the IRS’s proposed assessment of capital gains tax on his primary home.
But before Major Johnson pops the cork on his bottle of Champagne and begins celebrating, he should be reminded that he may be liable to pay U.S. income tax on his earned income. While this might take the wind out of his sails, it will do so only temporarily.
Why? Because as mayor of London, Mr. Johnson’s salary is paid by the U.K. government and salaries paid by the U.K. government – even those at the local level – are exempt from U.S. taxation. In other words, Mayor Johnson’s salary would not be taxed in the United States. As with the sale of his primary home, his salary would only be taxed in the U.K.
Is there a catch? Yes, but it should be obvious. In order for Mayor Johnson to take advantage of these generous tax benefits, he must submit a declaration with his U.S. tax return in which he unequivocally states that he is claiming these treaty benefits. Otherwise, his ability to claim these benefits could be put in jeopardy. Very simply, failure to submit a declaration, or worse yet, failure to file a return in a year in which he seeks such benefits could be a fatal blow.
Therefore, the mayor should be extra vigilant and not leave anything to chance. Now, whether he has been filing his FBARs (and if he knows what is good for him, he sure should have) is a story better left for another day.
Original Post By: Michael DeBlis