US exit tax 101: guide for US citizens and green card holders

Planning to give up your US citizenship or green card? Make sure you understand the exit tax before you do.

If your assets exceed certain thresholds, the Internal Revenue Service (IRS) may treat it as if you sold everything the day before you leave – and tax the gains. Harsh? It can be. And even if your assets aren’t high, you could still be hit with the exit tax if you make mistakes during the expatriation process.

What is exit tax?

When US citizens or long-term green card holders decide to renounce their US citizenship or officially cut ties with the United States of America, the IRS expects all tax obligations to be settled first.

The exit tax, also known as the expatriation tax, is a federal tax applied when you give up your US citizenship or long-term residency (green card). It’s the IRS’s way of taxing your unrealized gains, treating it as if you sold all your assets the day before you leave the US tax system – even if no actual sale took place.

This rule was introduced in 2008 to prevent high-net-worth individuals from avoiding future US taxes by simply renouncing their status.

Who is subject to exit tax?

Not everyone who gives up US citizenship or a green card ends up paying the exit tax. This tax targets a specific group the IRS calls covered expatriates.

Who are covered expatriates?

You're considered a covered expatriate if you meet any of the following three tests at the time you expatriate.

1. Net worth test: If your total net worth is $2 million or more, you’re a covered expatriate. This includes everything you own globally.
2. Average tax liability test: If your average annual US income tax liability for the five years before expatriation is more than $201,000 (for 2024), you’re considered a covered expatriate.
3. Certification test: Even if your net worth and tax liability are low, you can still be considered a covered expatriate if you fail to certify that you’ve met all your US tax obligations for the past five years. You do this on Form 8854, Initial and Annual Expatriation Statement. If you don't file this form, the IRS may automatically consider you a covered expatriate.

What about green card holders?

If you’ve held a green card for at least eight of the last 15 years, you’re subject to the covered expatriate rules. Whether or not you owe exit tax depends on the three tests outlined earlier.

But if a tax treaty treats you as a nonresident for US tax purposes, that year you make this election won’t count toward the eight-year threshold. This may allow you to be considered a nonresident at the time you give up your green card – and avoid being subject to the exit tax. Treaties with Canada, the UK, France, and Germany include this option. To claim your nonresident status, you must file Form 8833.

If you are not a long-term green card holder, you only need to file three years of tax returns to give up your green card (instead of five). You don't need to file Form 8854, but you do have some other important tax requirements.

Before taking action, speak with a tax professional.

Are there any exceptions?

Yes. The exceptions are narrow, but if you qualify, they can help you avoid a large tax bill:

• Dual citizens at birth: If you were born a citizen of both the US and another country, and you’re still a citizen and tax resident of that other country, you may be exempt – as long as you haven’t lived in the US for more than 10 of the last 15 years.
• Minors under 18 and a half: If you expatriate before you turn 18 and a half and haven’t been a US tax resident for more than 10 years, you can also avoid being classified as covered.

How exit tax is calculated

If you're a covered expatriate, the IRS treats it as if you sold all your worldwide assets at fair market value the day before you expatriate. Any unrealized gains become subject to capital gains tax. After that, the US no longer taxes those assets. Your new country of residence will set the tax basis for any future gains.

This approach is called the mark-to-market regime, and the IRS applies it to:

• investments: stocks, bonds, and securities
• real estate: property owned domestically or internationally
• other assets: pensions, collectibles, and other personal property

Tax relief: In 2024, the IRS allows you to exclude up to $866,000 in gains from tax. Anything above that is taxed at standard capital gains rates.
Not all assets follow the same rules. For example, specified tax-deferred accounts, and interests in non-grantor trusts may be taxed under different methods, with their own timing and withholding rules.

Covered expatriate? Don’t forget Form W-8CE

If you're a covered expatriate with deferred compensation – like a 401(k) or pension – you must file Form W-8CE within 30 days of expatriation, or before the first distribution, whichever comes first. With this form, you’ll notify your plan administrator that your account qualifies as eligible deferred compensation under US tax rules.

If you don’t file it, your plan may be treated as ineligible, and you could be taxed on the entire account balance as if you received it all on the day you expatriated.

Net investment income tax (NIIT)

Before you expatriate, any net investment income may also be subject to the 3.8% NIIT, if your income exceeds the threshold ($200,000 for single filers and heads of households).

NIIT doesn’t apply after expatriation, but if you trigger large gains through the mark-to-market rule, it can increase your final US tax bill.

Calculating exit tax can get complicated, especially with mixed asset types and cross-border holdings. It’s smart to get help from a tax advisor who knows the ins and outs of exit tax. At Taxes for Expats, we’ve successfully helped hundreds of clients to expatriate or renounce their green cards.

Do I still need to file any US taxes after paying exit tax?

If you keep having financial ties to the US even after you expatriate – such as owning rental property, holding US investments, or receiving income from US-based pensions – you may still owe tax on US-sourced income, just like any other nonresident. You may need to file Form 1040-NR and could be subject to a 30% nonresident alien withholding tax.

As part of the renunciation process, you give up the right to use tax treaty benefits going forward. That means treaty elections won’t reduce your withholding tax rate.

You may also need to file Form 8854 to report certain post-expatriation items, depending on your situation.

Strategies to minimize or avoid exit tax

With the right tax planning, you may be able to reduce or even avoid the exit tax altogether.

If your net worth is close to $2 million, consider strategies to bring it below the threshold like gifting assets or restructuring holdings before giving up your citizenship or green card. Timing matters, too. If your average tax liability is trending downward, delaying your expatriation could help you fall below the threshold. But if you're expecting a large inheritance or asset sale, leaving before that event may be the smarter move.

If you're classified as a covered expatriate, any gifts or inheritances you leave to US citizens or residents can be subject to a 40% inheritance tax on gifts from expatriates (in 2024), paid by the recipient.

Failing to file or correct past tax returns is one of the most common reasons people become covered expatriates. Make sure you're fully compliant before submitting Form 8854.

Renouncing US citizenship? Here's what else to consider

Remember that your renunciation is permanent. It can affect your ability to pass on citizenship to children, access certain US government services, or maintain business or legal ties with the United States.

Below are a few key implications beyond the exit tax, though this list is not exhaustive.

• You’ll need a visa to visit the US, and re-entry could be restricted if the government believes your renunciation was primarily for tax avoidance.
• Social Security benefits may still be paid, but access can vary depending on your country of residence.
• Estate and gift planning changes. Receiving large gifts or inheritances from US persons could trigger tax obligations.
• You may also need to restructure your banking and investment accounts, as some US financial institutions restrict services to non-citizens.

Make your exit smooth – talk to a tax professional

The exit tax is complex – and getting it wrong can be costly. If you're unsure whether you qualify as a covered expatriate or how to calculate your potential tax liability, don’t guess. An experienced expat tax professional can help you make informed decisions.

Whether you're planning to renounce your US citizenship or wait and reassess, a tax advisor can guide you through the expatriation process and help you stay compliant. Our team will review your financials, assist with Form 8854, and develop a plan to reduce your tax exposure, so you can exit the US tax system with confidence.