By Kenneth H. Bridges, CPA, PFS December 2014
The U.S. has what is known as a “worldwide tax system” whereby it taxes its citizens and residents (including domestic corporations) on their worldwide income, from whatever source derived, and then permits a credit or partial credit for taxes properly paid to other countries (so long as the effective rate paid the other country does not exceed the effective rate paid the U.S. on that same income). This is in contrast to the “territorial tax system” utilized by most countries, whereby the country only taxes income earned in that country.
So, with that background, could the Mayor of London possibly owe U.S. tax on the sale of his London home? It appears so. Boris Johnson, the Mayor of London, was born in the U.S., which, of course, makes him a U.S. citizen, even though he claims not to have lived in the U.S since he was 5 years old. As a U.S. citizen, he is subject to U.S. tax on his worldwide income. In most years, the combination of the “foreign earned income exclusion” and the “foreign tax credit” would likely zero out his tax otherwise due to the IRS. However, in 2009 Mayor Johnson sold his London residence for a substantial gain. UK tax rules provide for a total exclusion of gain from sale of your primary residence, whereas U.S. rules provide for only a limited exclusion. Thus, he had a taxable U.S. gain without a related UK tax to claim against it as a foreign tax credit, and the IRS has now sent him a bill for the tax.
Mayor Johnson could give up his U.S. citizenship, but, under a special mark-to-market deemed sale expatriation rule, that would likely trigger U.S. tax on the unrealized appreciation in any assets he owns, and also severely limit his ability to return to the U.S. without being further subjected to U.S. tax.
Johnson has been very vocal in his outrage about the U.S. tax bill, and has thus far refused to pay it. It should be noted that in the past he has pressed the U.S. embassy in London to pay “congestion charge” fines, which the U.S. has refused to pay on the basis of diplomatic immunity.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.