US Exit Tax: Your Guide for Renouncing Citizenship
- What Is the Exit Tax and Who Pays It?
- Am I a Covered Expatriate?
- How Is My Exit Tax Calculated?
- Real-World Calculation Examples
- What About My Retirement Accounts and Pensions?
- Can I Reduce or Avoid the Exit Tax?
- What Common Mistakes Should I Avoid?
- How Does the U.S. Exit Tax Compare to Other Countries?
- What If I'm Behind on My Tax Returns?
- Ready to Move Forward with Confidence?
- Frequently Asked Questions
Nearly 5,000 Americans officially renounced their U.S. citizenship in 2024, according to the IRS’s quarterly publications. If you’re considering this significant decision, here’s the relief you need: most people who renounce pay zero exit tax. The exit tax only applies to high-net-worth individuals who meet specific thresholds. With proper planning, even covered expatriates can often reduce or eliminate their tax liability.
The U.S. exit tax (formally called the expatriation tax) applies only to “covered expatriates” who meet at least one of three tests: net worth of $2 million or more, average annual tax liability exceeding $206,000 (2025), or failure to certify five years of tax compliance. For covered expatriates, the IRS treats your worldwide assets as sold the day before expatriation and taxes net gains above $890,000 (2025 exclusion) at capital gains rates of 15-20%.
If you’re well below these thresholds, you won’t owe exit tax, just the $2,350 State Department renunciation fee and your final tax return. If you’re close to a threshold or have complex assets, strategic planning before expatriation can make the difference between owing nothing and facing a six-figure tax bill. Either way, we’re here to help you make this decision with clarity and confidence.
What Is the Exit Tax and Who Pays It?
The exit tax is a one-time tax on unrealized capital gains for certain individuals who renounce U.S. citizenship or terminate long-term U.S. residency. It was designed to prevent high-net-worth individuals from avoiding U.S. taxes by expatriating after building substantial wealth, while still enjoying the benefits of U.S. citizenship.
The critical point is that the exit tax targets only covered expatriates. Most Americans living abroad who renounce citizenship are not covered expatriates and owe no exit tax at all.
Who Is Subject to the Exit Tax?
Exit tax provisions apply to two groups:
U.S. Citizens
Anyone who formally renounces their U.S. citizenship at a U.S. embassy or consulate, regardless of how long they’ve lived abroad or whether they hold another citizenship.
Long-Term Green Card Holders
Those who held a green card for at least 8 of the last 15 years before relinquishing it. This is calculated by calendar year presence, meaning even partial-year residence counts as a full year. Because of this rule, someone could technically qualify as a long-term resident in as few as 6 years plus 2 days, depending on timing.
Some dual citizens from birth may qualify for an exception from covered expatriate status if they meet specific residency and filing requirements. However, they must still file Form 8854 and certify tax compliance.
Ready to leave the US tax system? We’ll help you do it right.
Am I a Covered Expatriate?
You become a covered expatriate and potentially owe exit tax if you meet any one of these three tests on your expatriation date:
Test 1: Net Worth Test
Threshold: Your worldwide net worth equals or exceeds $2 million
Your net worth includes everything you own worldwide: real estate, investments, retirement accounts, business interests, personal property, minus your liabilities like mortgages and loans. Only your individual net worth counts; spousal assets are not automatically combined.
Example: You own a home worth $800,000 with a $300,000 mortgage (net $500,000), investment accounts worth $1.2 million, and a car worth $40,000. Your total assets are $2,040,000, minus the $300,000 mortgage, which equals a net worth of $1,740,000. You’re not a covered expatriate based on this test.
Test 2: Income Tax Liability Test
Threshold: Your average annual net U.S. income tax liability for the 5 years before expatriation exceeds $206,000 (2025)
This refers to actual tax paid, not gross income. Many high-earning expats have low U.S. tax liability after using the Foreign Earned Income Exclusion or Foreign Tax Credit, keeping them below this threshold even with substantial salaries.
Example: You earned $250,000 annually for the past 5 years, but excluded $130,000 each year using the FEIE and claimed Foreign Tax Credits for the remainder. Your average annual U.S. tax liability was $0. You’re not a covered expatriate based on this test.
Test 3: Tax Compliance Test
Threshold: You cannot certify on Form 8854 that you complied with all U.S. federal tax obligations for the 5 years preceding expatriation
This includes filing all required tax returns, FBARs, and other reporting forms. Failing this test automatically makes you a covered expatriate, even if you’re nowhere near the wealth or income thresholds.
This is the most common and most preventable way people become covered expatriates. If you’re behind on filings, catching up before renouncing is essential.
| Test | 2025 Threshold | How to Pass |
| Net Worth | Under $2,000,000 | Reduce assets or increase liabilities before expatriation |
| Tax Liability | Under $206,000 average over 5 years | Smooth income, time for large transactions outside the lookback period |
| Compliance | Full 5-year compliance certification | File all back returns using Streamlined Filing if needed |
If you meet even one of these three tests, you’re a covered expatriate subject to exit tax rules. However, passing all three tests means you owe no exit tax; file Form 8854 with your final return, and you’re done.
How Is My Exit Tax Calculated?
For covered expatriates, the IRS applies a “mark-to-market” regime. This means they pretend that you sold all your worldwide assets at fair market value on the day before your expatriation date, even though no actual sale has occurred.
The Five-Step Calculation
Step 1: List All Assets
Include investments, real estate (domestic and foreign), business interests, cryptocurrency, collectibles, personal property, everything you own worldwide.
Step 2: Determine Fair Market Value
Establish what a willing buyer would pay for each asset on your expatriation date.
Step 3: Calculate Gains or Losses
For each asset, subtract your cost basis (what you paid, plus specific adjustments) from the fair market value to determine gain or loss.
Step 4: Net Your Total Gain
Add all gains and subtract all losses. Real losses reduce your total gain; this is important for tax planning.
Step 5: Apply the Exclusion and Calculate Tax
Subtract the $890,000 (2025) exclusion from your net gain. Tax what remains at long-term capital gains rates (typically 15-20%, plus potential 3.8% Net Investment Income Tax).
Critical Point: The $890,000 exclusion applies once to your total net gain, not per asset. Losses from some assets reduce gains on others before the exclusion is applied.
Real-World Calculation Examples
Example 1: Below the Exclusion (No Exit Tax)
- Investment portfolio: $1,200,000 FMV, $700,000 basis = $500,000 gain
- Foreign rental property: $600,000 FMV, $450,000 basis = $150,000 gain
- Cryptocurrency: $80,000 FMV, $150,000 basis = ($70,000) loss
- Total net gain: $580,000
- Less exclusion: $890,000
- Taxable amount: $0
Result: No exit tax owed. The crypto loss helped reduce your overall gain below the exclusion.
Example 2: Above the Exclusion (Partial Exit Tax)
- Business interests: $3,000,000 FMV, $500,000 basis = $2,500,000 gain
- Real estate portfolio: $1,800,000 FMV, $900,000 basis = $900,000 gain
- Investment accounts: $800,000 FMV, $650,000 basis = $150,000 gain
- Art collection: $200,000 FMV, $450,000 basis = ($250,000) loss
- Total net gain: $3,300,000
- Less exclusion: $890,000
- Taxable amount: $2,410,000
- Tax at 20% capital gains rate: $482,000
- Plus 3.8% NIIT: $91,580
- Total exit tax: $573,580
Result: Substantial exit tax liability. This scenario calls for advanced planning strategies.
What About My Retirement Accounts and Pensions?
Traditional retirement accounts and pension plans don’t follow the simple deemed sale calculation. Instead, they receive special treatment:
IRAs and Similar Accounts
The full account balance is treated as if you took a complete distribution the day before expatriation. The entire amount is taxable as ordinary income, but you avoid the 10% early withdrawal penalty even if you’re under 59½.
401(k)s and Employer Pensions
You face a choice:
- 30% withholding option: Accept flat 30% U.S. withholding on all future distributions
- Present value option: Include the present value of your entire pension in current income
The better choice depends on your total account balance, expected withdrawal timeline, and any applicable tax treaty benefits.
Foreign Pensions
Treatment varies significantly based on pension type, country location, and treaty provisions. Some tax treaties may exempt certain foreign pensions from U.S. taxation entirely.
Retirement account taxation is among the most complex aspects of exit tax planning. Professional modeling of both options is essential to avoid costly mistakes.
Can I Reduce or Avoid the Exit Tax?
Yes, the exit tax can often be reduced significantly or avoided entirely through strategic planning before you renounce. Once you’ve expatriated, your options disappear. Here are proven strategies:
Strategy 1: Manage Your Net Worth
If you’re close to the $2 million threshold, consider:
- Gifting assets to family members (subject to U.S. gift tax rules and annual exclusion limits)
- Charitable contributions that reduce your estate while providing tax benefits
- Strategic debt structuring to present an accurate picture of net worth
- Timing asset valuations to capture lower market values if possible
Remember: Only your individual net worth counts. Assets held jointly with a non-US citizen spouse don’t automatically count toward your threshold.
Strategy 2: Smooth Your Income Tax Liability
If your five-year average tax liability is approaching $206,000:
- Defer large income events like business sales or significant stock option exercises until after the five-year lookback window
- Accelerate deductions in high-income years to reduce tax liability
- Time your expatriation strategically to exclude high-tax years from the calculation
Strategy 3: Perfect Your Tax Compliance (Critical!)
This is the most critical strategy because failing the compliance test makes you a covered expatriate regardless of wealth or income:
- File all missing tax returns for the past 5 years (or more if needed)
- Submit delinquent FBARs for all years with foreign accounts over $10,000
- Use Streamlined Filing Compliance Procedures if your non-filing was non-willful (no penalties for qualifying taxpayers)
- Consider IRS voluntary disclosure programs if non-compliance was willful
Many expats can catch up penalty-free through Streamlined Filing and avoid covered expatriate status entirely, even if they haven’t filed in years.
Strategy 4: Time Your Expatriation Strategically
When you expatriate matters:
- Green Card holders: Renounce before reaching 8 years out of the last 15 to avoid long-term resident status
- Market timing: Consider expatriating during market downturns when asset values are lower
- Currency considerations: Exchange rate fluctuations can significantly affect the dollar value of foreign assets
- Life events: Coordinate with other major financial events like business sales or large inheritances
Strategy 5: Maximize Foreign Tax Credits and Treaties
For certain assets and income:
- Foreign Tax Credits may offset some U.S. tax if you’ve already paid tax to another country
- Tax treaties might protect specific pensions or provide reduced withholding rates
- Treaty tie-breaker provisions can sometimes determine residency in favorable ways
These benefits largely disappear after expatriation, so coordination must happen before you renounce.
What Common Mistakes Should I Avoid?
Mistake 1: Failing to Catch Up on Taxes Before Renouncing
This is the primary reason people become unnecessarily covered expatriates. File those back returns!
Mistake 2: Assuming the Exclusion Applies Per Asset
The $890,000 exclusion applies once to your total net gain, not to each individual asset.
Mistake 3: Forgetting to Count Losses
Real losses on some assets reduce your total gain. A poorly performing investment might lower your exit tax.
Mistake 4: Not Getting Professional Valuations
Accurate fair market valuations are crucial. Overvaluing assets increases your tax; undervaluing them risks IRS challenges.
Mistake 5: Renouncing Before Strategic Planning
Every covered expatriate should model multiple scenarios before making this irreversible decision.
How Does the U.S. Exit Tax Compare to Other Countries?
The U.S. isn’t alone in imposing exit taxes. Many countries use similar “departure taxes” to tax unrealized gains built up during residency:
- Canada: Deemed disposition of most assets when giving up residency (some exclusions apply)
- Germany: “Virtual sale” rules for significant corporate shareholdings
- France: Exit tax on unrealized gains for high-net-worth individuals meeting specific thresholds
- Spain: Exit tax on unrealized gains for substantial shareholdings
- Australia: Deemed disposal of most assets at fair market value upon departure
Each country’s rules differ significantly in scope, thresholds, and calculation methods. If you’re moving to another country after renouncing U.S. citizenship, research their exit tax rules as well.
What About State Exit Taxes?
Some U.S. states, such as California, have more stringent residency rules and withholding requirements, but these differ from the federal exit tax. State “exit taxes” typically refer to withholding requirements on property sales by nonresidents or ongoing tax obligations resulting from changes in residency status, rather than one-time expatriation taxes.
What If I’m Behind on My Tax Returns?
This is critical: every U.S. citizen must file annual tax returns, regardless of their place of residence. If you’re behind on filings and want to renounce without becoming a covered expatriate, you must first bring your filings up to date.
The good news is that the IRS offers amnesty programs specifically for expatriates.
Streamlined Filing Compliance Procedures (Most Common Solution)
For non-willful failure to file:
- File 3 years of delinquent tax returns
- File 6 years of FBARs
- Self-certify that your failure was non-willful (accidental)
- Zero penalties if you qualify and the IRS hasn’t contacted you yet
Most expats who are unaware of their filing requirements qualify for this program. Even better, most owe $0 in taxes after using the Foreign Earned Income Exclusion or Foreign Tax Credit. Learn more about Streamlined Filing Compliance Procedures.
IRS Voluntary Disclosure
For willful non-compliance (intentional failure to file):
- More extensive filings required
- Penalties likely apply, though potentially reduced
- Still better than waiting for the IRS to find you
Time is critical: You must act before the IRS contacts you to qualify for these programs. Learn more about IRS voluntary disclosure procedures.
Ready to Move Forward with Confidence?
Whether you’re considering renunciation, already certain of your decision, or simply exploring your options, the exit tax is essential to understand. For most Americans abroad, the exit tax won’t apply at all. For those who are covered expatriates, strategic planning can dramatically reduce, or even eliminate, the tax burden.
We’ve helped thousands of expats assess their exit tax situation, catch up on delinquent filings, and complete Form 8854 correctly. Our CPAs and Enrolled Agents understand both the technical requirements and the emotional weight of this decision.
No matter how complex your financial situation or how far behind you are on taxes, we can help. You’ll have peace of mind knowing your exit tax calculations are accurate and your expatriation is handled correctly.
Behind on your U.S. tax filings? Fix your compliance issues before expatriating and avoid becoming a covered expatriate unnecessarily. Our team can guide you through Streamlined Filing so you can renounce without triggering exit tax.
Ready to assess your exit tax situation? If you’re ready to be matched with a Greenback accountant, click the get started button below. For general questions on expat taxes or working with Greenback, contact our Customer Champions.
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Frequently Asked Questions
Does everyone who renounces U.S. citizenship owe an exit tax?
No, only “covered expatriates” who meet at least one of three tests (net worth over $2 million, average annual tax liability over $206,000, or failure to certify 5 years of tax compliance) owe the exit tax.
How much is the exit tax?
There’s no single rate. The IRS treats your worldwide assets as sold and taxes net gains above $890,000 (2025 exclusion) at capital gains rates of 15-20%, plus potential 3.8% Net Investment Income Tax. Retirement accounts have different rules from ordinary income rates or the 30% withholding rate.
Can I avoid the exit tax legally?
Yes, through strategic planning before you renounce. Options include managing your net worth below $2 million, smoothing income to stay under tax liability thresholds, catching up on tax compliance through Streamlined Filing, and timing your expatriation strategically.
Does the exit tax apply to Green Card holders?
Yes, if you’re a “long-term resident” who held a Green Card for at least 8 of the last 15 years, and you meet the covered expatriate tests.
What happens if I’m behind on my tax returns?
Being non-compliant automatically makes you a covered expatriate, even if you don’t meet the wealth or income thresholds. You must catch up on filings (typically 3 years of returns plus 6 years of FBARs using Streamlined Filing) before renouncing to avoid the exit tax.
Is the $890,000 exclusion per person or per couple?
Per person. Each covered expatriate gets their own $890,000 exclusion amount.
Can I return to the U.S. after renouncing my citizenship?
Yes, but you’ll need a visa to visit or live in the U.S. Immigration rules may be stricter for former citizens, especially those who renounced for tax purposes.
How long does the renunciation process take?
The formal renunciation at a U.S. embassy or consulate happens in one appointment (after often lengthy wait times to get scheduled). However, the complete process, including tax compliance and Form 8854 filing, can take several months to over a year, depending on your situation.
Disclaimer: This article provides general information about U.S. exit tax requirements. Every situation is unique, and tax laws are subject to frequent changes. Consult with a qualified tax professional before making any decisions about renouncing U.S. citizenship or calculating the exit tax. Greenback Expat Tax Services offers personalized guidance tailored to your unique circumstances.
