US Exit Tax (Expatriation Tax): What It Is and How It Works

What is the U.S. Exit Tax?

The U.S. exit tax is a final tax bill charged to certain U.S. citizens and long-term Green Card holders that treats their renunciation or status change as a ‘deemed sale,’ taxing the unrealized gains on their worldwide assets as if they were sold for fair market value the day before they left.

Essentially, the IRS acts as if you sold all your property (houses, stocks, businesses) the day before you renounce citizenship, even if you didn’t actually sell anything. You are then taxed on the profit that those assets have built up over time.

Who Has to Pay the U.S. Exit Tax?

You are only subject to this tax if the IRS labels you a “Covered Expatriate.” You fit this label if you meet any one of these three conditions:

The Net Worth Test: If the total value of everything you own (homes, cars, stocks, retirement accounts, and business interests) is $2 million or more on the day you leave, you meet this test.
- Important: This is a “net” test. You subtract your debts (like mortgages or personal loans) from the value of your assets.
The Tax Liability Test (The “Net Tax” Rule): This test is often misunderstood. The IRS looks at your average annual net income tax for the five years before you leave.
- The 2025 Threshold: $206,000
- The 2026 Threshold: $211,000
- The Nuance: This refers to the actual tax you paid to the U.S. government after all credits and deductions. Because most expats use the Foreign Earned Income Exclusion (FEIE) or the Foreign Tax Credit (FTC), their U.S. tax liability is often very low (sometimes $0) even if they earn a multi-million dollar salary.
The Compliance Test: This test has nothing to do with how much money you have. Even if you are broke, you will be labeled a “Covered Expatriate” if you cannot certify on Form 8854 that you have been 100% compliant with U.S. tax laws for the last five years.
- This includes filing all required tax returns, FBARs (foreign bank account reports), and information forms for foreign businesses or trusts.

Note for Green Card Holders

You are only subject to these tests if you are considered a Long-Term Resident. This means you held your Green Card for at least part of 8 out of the last 15 tax years. If you leave in year seven, you can often avoid the exit tax entirely, regardless of your wealth.

Who Actually Pays the Exit Tax?

It is important to distinguish between the act of leaving and the act of paying. The reality is, only a small fraction of everyone who renounces their citizenship actually owes an exit tax. We can see this by comparing two different government lists:

The IRS “Covered” List (~5,000 per year): The IRS primarily publishes the names of “Covered Expatriates,” i.e., those who meet the high-wealth or tax thresholds.
The FBI NICS List (~78,000 total): The FBI tracks everyone who takes the oath of renunciation for background check purposes, regardless of their bank balance.

This means that only about 1 in 15 people who renounce actually meet the criteria for the U.S. exit tax. The process is still legally intense for everyone, but the actual “bill” is far less common than people think.

Important Exit Tax Terms Defined

Tax jargon can be confusing, but these three terms are the foundation of how much you could owe:

Fair Market Value (FMV):

This is the current “sticker price” of your asset. It is defined as the price a willing buyer would pay a willing seller on the open market. For a house, this would be based on a professional appraisal; for stocks, it’s the closing price on the day before you expatriate.

Cost Basis:

This is your starting point for tax purposes. Usually, it is the price you originally paid for the asset. If you bought a home for $500,000 and spent $100,000 on a renovation, your cost basis is $600,000.

Unrealized Gain:

This is the “built-in” profit that hasn’t been taxed yet. It is the difference between the Fair Market Value and your Cost Basis.

Realized vs. Unrealized: What’s the difference?

Realized Gain: You sold the asset. You have the cash. You owe tax on the profit.
Unrealized Gain: You still own the asset. The profit only exists “on paper.” Usually, the IRS doesn’t tax this, but the Exit Tax is the big exception.

Ready To Renounce Your Citizenship?

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How the U.S. Exit Tax Is Calculated (2025-2026)

The most important thing to understand is that the IRS does not tax your total net worth. Instead, they only tax your Unrealized Gains (your “Paper Profits”) that are over and above a specific limit.

The Statutory Exclusion (Your Tax-Free Allowance)

To prevent people from being hit by a massive bill, the law includes an “Exclusion Amount.” This is a chunk of profit (unrealized gains) that the IRS simply ignores when calculating your tax.

2025 Exclusion Amount: $890,000
2026 Exclusion Amount: $910,000

How the Statutory Exclusion Works

Think of the $910,000 (for 2026) as a deductible. You only pay tax on the portion of your total profit that exceeds this number.

Example: Imagine you own a home and some stocks. After calculating the difference between what you paid (Basis) and what they are worth today (Fair Market Value), you have a total Unrealized Gain of $1.5 million.

Start with Total Profit: $1,500,000
Subtract the IRS Allowance: – $910,000
The Taxable Remainder: $590,000

In this scenario, you are only paying capital gains tax on the $590,000 that sits “on top” of your exclusion.

Why does a $4 million net worth often result in $0 tax?

This is the most common point of confusion. If a person has a $4 million net worth but their assets are mostly cash or stocks they bought recently, their “paper profit” might only be $200,000.

Because that $200,000 profit is less than the $910,000 allowance, the IRS wipes out their entire tax bill. They are still “Covered Expatriates” because they passed the $2M Net Worth test, meaning they must still file the complicated paperwork, but their actual check to the IRS is zero.

The Calculation Steps:

List every asset you own (Home, Stocks, Crypto, Business).
Find the Profit: Subtract what you paid (Basis) from what it’s worth today (FMV).
Subtract your Shield: Take your total profit and subtract the exclusion amount ($910,000 for 2026).
Pay the Difference: You only pay capital gains tax on whatever is left over.

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.

Exit Tax Rules for IRAs, 401(k)s, and Deferred Compensation

It is a common mistake to assume the $910,000 allowance (for 2026) covers everything you own. In reality, the IRS treats retirement accounts and Health Savings Accounts (HSAs) very differently. These assets are excluded from the standard mark-to-market rules and have their own specific tax rules.

Specified Tax-Deferred Accounts (IRAs and HSAs)

If you are a “covered expatriate,” certain accounts are treated as if they were fully cashed out the day before you left. This is called deemed distribution.

Which accounts are affected?
- Traditional IRAs, Roth IRAs, Health Savings Accounts (HSAs), and 529 College Savings Plans.
The Tax Hit: You must report the entire balance of these accounts as ordinary income on your final U.S. tax return.
The Downside: You cannot apply the $910,000 exclusion to these accounts. They are taxed from the very first dollar.
The Silver Lining: The IRS generally waives the 10% early withdrawal penalty for these deemed distributions, even if you are under age 59½.

Take Note

It is important to understand that the IRS doesn’t actually force you to withdraw the money or close the account. However, they act as if you did. On your final U.S. tax return, you must report the entire balance of the account as if that cash was handed to you on the day before you left.

The Roth IRA Exception: Why It’s Usually Tax-Free

While a Traditional IRA is “fully cashed out” and taxed as income, a Roth IRA is often treated more favorably. This is because you already paid U.S. tax on the money before you put it into the account.

Your Contributions are Safe: You can always “withdraw” your original contributions tax-free, even in a deemed distribution.
The Earnings are the Question: The growth (interest/dividends) in the account is only tax-free if the distribution is “qualified.” Usually, this means you must be at least 59½ years old and have held the account for at least five years.
The “Cashed Out” Reality: If you are a covered expatriate under age 59½, the IRS treats the account as cashed out. You won’t pay tax on your contributions, but you will owe ordinary income tax on the earnings portion.

Eligible Deferred Compensation (401(k)s and Pensions)

Employer-sponsored plans like a 401(k) or a traditional U.S. pension are classified as Eligible Deferred Compensation. Unlike an IRA, you aren’t forced to pay all the tax on day one, but only if you follow a very strict “paperwork path.”

You can choose to “defer” the tax. Instead of paying tax on the whole balance when you leave, you can choose to pay it later, only when you actually take money out of the plan.
If you choose to defer, you must notify the plan administrator that you are a covered expatriate and file Form W-8CE within 30 days of leaving.
In exchange for waiting, the plan administrator will then deduct a flat 30% tax from every check they send you for the rest of your life. And you must irrevocably agree that you will not use any tax treaties to lower your U.S. tax rate on this money in the future.

What Happens if You Miss the 30-Day Deadline?

If you fail to provide Form W-8CE on time, your 401(k) instantly converts into the “bad” category (Ineligible Deferred Compensation).

The IRS will treat the entire balance as a lump-sum payment.
You will owe ordinary income tax on the full amount on your final U.S. tax return.
You lose the ability to spread the tax out over your retirement years

Planning to renounce in the next 12–24 months?

The best time to lower your tax bill is now. Review your expatriation plan with a Greenback CPA to see if gifting or income smoothing can keep you under the $2 million threshold.

How to Avoid “Covered Expatriate” Status

The best way to “beat” the exit tax is to avoid becoming a Covered Expatriate in the first place. If you don’t trigger any of the three tests (Net Worth, Tax Liability, or Compliance), you can leave the U.S. tax system without paying a “deemed sale” tax on your assets.

Strategies for Meeting the Net Worth and Tax Tests

If you are close to the limits, proactive financial planning can keep you in the “Non-Covered” category:

Asset Gifting: Since the $2 million threshold is per person, you can gift assets to a spouse or heirs to bring your individual net worth down.
- Note: In 2026, you can gift up to $195,000 to a non-citizen spouse or an unlimited amount to a U.S. citizen spouse.
Income Smoothing: If your average tax bill is near $211,000 (2026), avoid triggering large capital gains or bonuses in the year you leave. Sometimes waiting one extra year to renounce allows a high-tax year to “fall off” your five-year average.
The 8-Year Green Card Window: If you are a Green Card holder, the simplest strategy is to expatriate before you hit your 8th year of residency. This bypasses the “Long-Term Resident” rule entirely.

The Compliance “Safety Net”

Even if you have no money, failing the Compliance Test makes you “Covered.”

Meticulous Record-Keeping: Ensure you have five years of clean tax returns and FBARs.
The Streamlined Fix: If you are behind, use the IRS Streamlined Procedures to catch up before you renounce. This is the only way to certify compliance on Form 8854 truthfully.

How to Minimize US Exit Taxes if You Are a Covered Expatriate

If you cannot avoid being a “Covered Expatriate” (for example, if you are worth $10 million and cannot gift it away), your strategy shifts. You are now focused on reducing the amount of tax you owe.

Strategic Use of the Section 877A Allowance

As a covered expatriate, you get the $910,000 (2026) tax-free allowance. You should “allocate” this to your highest-growth assets.

Tax-Loss Harvesting: Sell underperforming assets at a loss before you leave. These losses can offset your gains before the $910,000 allowance is even applied, further lowering your taxable total.

Protecting Your Retirement with Form W-8CE

Because your 401(k) doesn’t get the tax-free allowance, your goal is to avoid an immediate “lump sum” tax on the whole balance.

The 30-Day Election: You must file Form W-8CE with your plan administrator within 30 days of leaving. This forces the IRS to let you pay tax slowly (30% withholding) as you take distributions in the future, rather than all at once today.

Managing the “Section 2801” Inheritance Tax

If you are “Covered,” your U.S. heirs face a 40% tax on any gift or inheritance you give them later.

Pre-Exit Gifting: Many high-net-worth expats give large gifts to their U.S. children before renouncing their U.S. citizenship. Since they (the donor) aren’t “Covered” yet, the 40% inheritance tax doesn’t apply to these gifts.

Section 2801 tax only applies to gifts made by someone who is already a “Covered Expatriate.”

Before you renounce: You are still a U.S. citizen. If you give a gift today, you are just a regular American making a gift. You use your standard lifetime gift tax exemption (which is roughly $15 million in 2026). As long as your gift is under that amount, there is no 40% tax for the recipient.
After you renounce: If you are labeled a “Covered Expatriate,” the rules change instantly. The $15 million exemption disappears. Now, if you give a gift to a U.S. person, they must pay a flat 40% tax on every dollar above the annual exclusion ($19,000).

Summary: Planning for Both Scenarios

Goal	Strategy	Best Time to Act
Avoid “Covered” Status	Gifting, timing, and compliance catch-up.	1–3 years before exit.
Reduce “Covered” Tax	Loss harvesting, Form W-8CE, and step-up basis.	30–90 days before exit.

Breaking Ties with “Sticky States”

While the federal government lets you go when you renounce, your home state might not. States like California, New York, Virginia, and South Carolina have aggressive residency rules.

Ongoing Tax Liability: If you don’t properly sever ties, these states may continue to tax your global income after you’ve renounced your U.S. citizenship.
How to Sever Ties: You must cancel your state driver’s license, remove yourself from voter rolls, and ensure you do not maintain a “permanent place of abode” (like a vacant home) in the state.

Common Mistakes to Avoid

The IRA Trap: Rolling over a 401(k) into an IRA right before leaving. (This changes a 30% future tax into a 100% immediate tax).
Missing the 30-Day Window: Forgetting to file Form W-8CE with your 401(k) provider.
Assuming the Exclusion is Per Asset: The $910,000 allowance applies once to your total gains, not to each individual item.
Ignoring State Residency: Assuming that renouncing your passport automatically ends your obligation to California or New York.

The Bottom Line: What Every Expat Needs to Know

Renouncing your U.S. citizenship is a significant legal and emotional milestone, but the financial “exit tax” doesn’t have to be a surprise.

The 1-in-15 Rule: Statistically, most Americans who leave don’t owe an exit tax, but everyone must still prove their compliance to the IRS.
Gatekeeper vs. Allowance: Your Net Worth ($2M) gets you into the “Covered” category, but your Unrealized Gain Allowance ($910k) is what actually determines your bill.
Retirement Risks: IRAs are taxed immediately as a lump sum, while 401(k)s can be deferred—but only if you hit the strict 30-day paperwork deadline.
Don’t Forget the State: Ending your U.S. citizenship doesn’t automatically end your residency in “sticky states” like California or New York.
Planning is Power: Gifting, income smoothing, and catching up on back taxes before you renounce are the only ways to legally lower your tax burden.

The best exit tax strategy starts years before you renounce.

If you’re planning to leave the U.S. in the next few years, now is the time to start gifting, appraisals, and income smoothing. Let us help you build a multi-year roadmap to ensure your exit is as tax-efficient as possible.

Frequently Asked Questions

Does everyone who renounces citizenship owe a US exit tax?

No. Only “Covered Expatriates” who meet the wealth, tax, or compliance tests. Roughly 1 in 15 people who renounce actually pay the tax.

What is the cost to renounce US citizenship?

The State Department fee is $2,350, payable at your consulate appointment. This is separate from any taxes owed.

What if I’m behind on my tax returns?

You must be compliant for the 5 years prior to renouncing. If you aren’t, you are automatically a Covered Expatriate. Use the Streamlined Procedures to catch up first.

Does the US exit tax apply to Green Card holders?

Only if you are a “Long-Term Resident” (held the card for 8 of the last 15 years) and meet the covered expatriate tests.

What makes someone a “covered expatriate”?

You are generally considered a covered expatriate if any one of the following applies at the time of expatriation:
– Your average annual U.S. income tax liability exceeds the IRS threshold for the prior five years
– Your net worth is $2 million or more
– You fail to certify full U.S. tax compliance for the previous five years
Meeting just one test can trigger covered expatriate status.

How is the U.S. exit tax calculated?

For covered expatriates, the IRS treats most worldwide assets as if they were sold at fair market value the day before expatriation. Unrealized gains above the annual exclusion amount are taxed at applicable capital gains rates. Certain assets, such as retirement accounts, are subject to special rules.

What assets are subject to the exit tax?

The exit tax generally applies to most forms of property, including investments, real estate, business interests, and valuable personal property. Retirement accounts and deferred compensation plans may be taxed differently depending on the type of account and treaty considerations.

Is there an exclusion amount for the U.S. exit tax?

Yes. Each year, the IRS provides an exclusion amount that reduces the total unrealized gains subject to exit tax. Gains below this threshold are not taxed. The exclusion amount is adjusted annually for inflation.

Can the US exit tax be reduced or avoided?

In some cases, yes. Advance planning may help reduce or eliminate exit tax exposure. Common strategies include ensuring full tax compliance, carefully timing expatriation, managing asset values, and planning for retirement accounts. Because expatriation is permanent, it’s important to plan ahead before renouncing citizenship or surrendering your green card.

Do I still need to file U.S. taxes after renouncing citizenship?

Yes. Individuals who expatriate must file a final U.S. tax return and specific expatriation forms for the year of renunciation. In some cases, additional reporting may apply even if no exit tax is owed.

Is the U.S. the only country with an exit tax?

No. Several countries have implemented or proposed forms of exit taxation, often targeting unrealized gains when high-net-worth individuals leave the tax system. However, the U.S. exit tax is unique because it is tied to citizenship-based taxation rather than residency alone.

Should I speak with a tax professional before renouncing U.S. citizenship?

Yes. Renouncing U.S. citizenship or giving up a green card has permanent tax consequences. Consulting an expat tax professional before taking action can help clarify whether exit tax applies and prevent costly mistakes.

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.