Taxation Task Force RBT Bill

RBT Case Studies

Case Studies for Elective RBT

 

U.S. citizens on temporary work assignment

Bob and Lisa are a couple with two children. Bob is employed by a Fortune 500 company. He is sent to work in Toronto on a three year assignment. Bob and Lisa decide to continue to be taxed as U.S. residents during the period of their Toronto assignment and then they return to the U.S.

 

U.S. citizen who lived abroad most of their working life

Latisha is a college student who goes on a study abroad program in Mexico. She falls in love and decides to stay in Mexico with her partner who she eventually marries, working as an English teacher. A few years later, she has put down roots in Mexico and realizes that the cost and complexity of filing U.S. taxes are high: The cost of filing her taxes consistently exceeds the taxes that she owes the U.S. Her local bank in Mexico has restricted the kinds of accounts that she can hold because of her U.S. citizenship. She has also become aware that as a U.S. tax resident living in Mexico she has difficulties saving for retirement. Her assets are primarily located in Mexico. She elects to transition to Non-Resident status.

 

Accidental American

Audrey was born in Australia to an Australian father and an American mother. She has never lived in the United States and has no U.S. assets. She is deemed to have been a Non-Resident from birth. As an “Accidental American,” she does not owe departure tax.

 

Naturalized U.S. citizen who returns to home country

Peter was born in Germany as a German citizen. He moved to the United States as a young adult, and became a successful businessman, who naturalized as a U.S. citizen. He owns substantial financial assets in the U.S., including a rental property in California. Peter’s parents are getting older, and he decides to move back to Germany to take care of them. He does not expect to return to the United States, so he needs to make a decision about whether to terminate his tax residency by paying the departure tax. He would have to pay tax on the capital gains estimated from a deemed-sale analysis on all of his non-property financial assets located in the U.S. Although the cost of the departure tax would be high enough to require him to sell some of his financial assets to cover it, he decides to complete the procedure to be deemed a U.S. Non-Resident  so that he can invest in German assets without being under conflicting tax systems resulting in double taxation, and will avoid the high cost of completing a tax return from outside the U.S. He is also concerned about potential difficulties with investing in a non-U.S. pension. Following the payment of the exit tax, he is taxed as a Non-Resident with withholding on any income from his U.S. securities investments and California real estate.

 

Retirees with most income earned while living in the U.S.

Tom and Mary are middle-class Americans from Cincinnati. They retire at age 65 and decide to spend the early years of their retirement living in Spain. Most of their assets remain in the U.S. They have found a bank in Spain that is willing to let them open an account. (Their banking and investment needs are relatively simple, given that their investments are primarily based in the U.S.) They decide to remain in the U.S. tax system since most of their income is from Social Security. They will have to file an FBAR form for their local bank account in Spain, but will not be subject to FATCA given their U.S.-centric investments.

 

Retiree with most income earned while living abroad

Jane moved from North Carolina to France when she was 25 and is now a 66 year old retiree still living in France. She worked as an French-English translator and all of her retirement income is in a French retirement account in France. Jane currently receives retirement distributions from her French retirement account and pays taxes in France on those distributions. For her US tax return, she uses Foreign Tax Credits to offset US tax liability. Given taxes in France are higher than taxes in the US, she doesn’t owe any US tax. International information reporting forms like Form 8938 and FinCEN 114 are difficult for her to understand, so she pays an accountant $650 every year to do her US tax return to prove she owes no US tax. If Jane were to do the RBT election, she would no longer have to pay $650 a year to an accountant to prove she owes no US tax and pays tax in France. The funds within her retirement account would be subject to a 15% tax on dividend income received from U.S. companies.

 

Jeff Bezos Case Study

Were Jeff Bezos to move to Monaco, elect RBT, and terminate U.S. tax residency, the resulting deemed sale of ~$125B+ in unrealized capital gains would yield approximately $32B in capital gains tax. Assuming that his current tax payments of roughly $1.5 to $2B/yr were to continue at the current rate, this corresponds to at least 15 years worth of his tax payments, starting to resemble his remaining life expectancy. Irrespective of what Jeff Bezos would pay after terminating tax residency, the one-time departure tax would eclipse any taxes that he would foreseeably pay within the coming years according to his present financial situation. He would also remain subject to the U.S. estate tax upon his eventual death.

Data points for reference:

  • Unrealized capital gains:
    • $125B (2018, per ProPublica)
  • Annual taxes paid: $1.4B/yr (2018, per ProPublica)
  • Effective tax rate of
    • 23% based on annual realized income of $4.2B
  • Taxation strategy:
    • Standard Buy, Borrow, Die (ProPublica estimates his tax rate to be only 0.98% when calculated based on income that has not yet been realized)
  • Bezos is 61 years old; there is a risk of the step-up basis occurring in the next 10 to 20 years, which would result in at least $40B in tax leakage if no realization event occurs.