The Exit Tax: What You Need to Know Before Renouncing U.S. Citizenship
What is the U.S. exit tax?
The United States imposes an exit tax — formally known as the expatriation tax under Internal Revenue Code Section 877A — on certain individuals who relinquish U.S. citizenship or terminate long-term U.S. residency (generally, holding a green card for at least 8 of the last 15 years). The exit tax is designed to capture the unrealized appreciation in a departing taxpayer's worldwide assets before they leave the U.S. tax system permanently.
The exit tax does not apply to everyone who renounces citizenship or gives up a green card. It applies only to "covered expatriates" — a category defined by specific financial and compliance thresholds.
Who is a covered expatriate?
An individual is a covered expatriate if they meet any one of the following three tests on the date of expatriation:
• Net worth test: The individual's net worth is $2 million or more on the expatriation date.
• Average annual net income tax test: The individual's average annual net income tax liability for the five years preceding expatriation exceeds a threshold adjusted for inflation (approximately $201,000 for 2024).
• Compliance certification test: The individual cannot certify under penalty of perjury that they have complied with all U.S. tax obligations for the five years preceding expatriation — including filing all required returns, paying all taxes owed, and meeting all foreign account reporting requirements.
The compliance test is particularly unforgiving. Even a taxpayer who is not wealthy and has modest income can become a covered expatriate if they have unreported foreign accounts or unfiled returns in prior years. Getting compliant before expatriating is essential.
How the mark-to-market exit tax works
The primary mechanism of the exit tax is a mark-to-market rule: on the day before expatriation, the covered expatriate is deemed to have sold all of their worldwide assets at fair market value. Gain recognized on this deemed sale is taxable as if the assets had actually been sold, subject to an annual exclusion (approximately $866,000 in 2024, adjusted for inflation). Tax on any gain above the exclusion is due with the expatriate's final U.S. tax return.
Certain assets are not subject to the mark-to-market rule and instead have their own special rules: deferred compensation items (such as IRAs and pension interests), interests in non-grantor trusts, and interests in certain tax-deferred accounts. These items are generally taxed when distributions are made rather than at the time of expatriation, but the tax is withheld at a flat 30% rate.
The gift and inheritance tax on covered expatriates
Section 2801 of the Internal Revenue Code imposes an additional layer of tax on U.S. citizens and residents who receive gifts or inheritances from covered expatriates after the date of expatriation. The recipient — not the donor — owes a tax equal to the highest applicable estate or gift tax rate (currently 40%) on the value of the gift or bequest. This provision is designed to prevent covered expatriates from transferring wealth to U.S. family members without tax cost after leaving the system.
Planning before you renounce
The decision to renounce U.S. citizenship or abandon a long-term green card should never be made without comprehensive tax planning. The timing of expatriation, the composition of the asset portfolio, the treatment of retirement accounts, and compliance with all prior filing obligations can all affect the exit tax calculation significantly. In some cases, restructuring assets before expatriation can materially reduce the tax cost. In others, the exit tax may be unavoidable — but at least it can be anticipated and budgeted.
Expatriation is one of the most consequential and technically complex decisions in international tax planning. Our attorneys advise clients on exit tax planning, pre-expatriation restructuring, and compliance with all related filing obligations. Contact us before you make any irrevocable decisions.
