US Exit Tax: Who Pays & How Much It Costs to Renounce
The US exit tax is levied on individuals renouncing their US citizenship or green card. This tax is designed for wealthy individuals, ensuring their worldwide income and assets are taxed before exiting the US tax system.
Here’s how it works.
Key Takeaways
- The US exit tax applies to some citizens and long-term residents renouncing their status.
- When a person meets the definition of “Covered expatriates,” they must calculate the potential Exit tax.
- Being a Covered Expatriate depends on net worth, tax liability, and compliance history.
- Certain strategies can help reduce or avoid this tax legally.
What Is the US Exit Tax?
When US citizens and residents choose to renounce their citizenship or Green Card status, they must resolve any potential outstanding tax obligations. In some cases, that means paying an exit tax.
The exit tax applies to all assets, including stocks, bonds, real estate, and retirement accounts — essentially all worldwide property owned on the day before expatriation. The IRS treats these assets as if they were sold, taxing any unrealized gains. For example, if you bought a stock for $200,000 and it’s worth $500,000 when you renounce, the $300,000 gain is taxable.
Why does the Exit tax exist? To prevent tax avoidance by wealthy individuals leaving the US. It’s not a penalty but a final bill for unpaid tax debts.
Who Must Pay the Exit Tax?
Not everyone who leaves the US tax system is required to pay an exit tax. Only US citizens and long-term residents the IRS considers “covered expatriates” are subject to this tax if they renounce their citizenship or residency. Here’s how the IRS decides:
- Net worth: If your personal net worth exceeds $2 million on the day you renounce, you’re a covered expatriate. This includes all assets (cars, jewelry, stocks) valued at fair market value, as if sold.
- Annual net income tax: If your average annual net income tax liability over the five tax years before expatriation exceeds $201,000 as of 2024 (estimated at $208,000 for 2025 per IRS trends).
- Tax filing compliance: When filing Form 8854, you must certify compliance with US tax obligations for the past five years. Miss a return? You’re a Covered Expatriate, regardless of wealth or income.
Covered vs. Non-Covered Expatriates
| Status | Covered Expatriate? |
| Net worth > $2 million | Yes |
| Annual tax liability > $201,000 (2024 figure, estimated at $208,000 for 2025) | Yes |
| Non-compliant with tax filings | Yes |
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Who Counts as a US Person?
US Citizens
US citizens renouncing citizenship are the most common group facing the exit tax, judged by the above criteria.
Long-Term Residents
Green Card holders who’ve lived lawfully in the US in eight of the last 15 years may also be subject to the tax. The definition of the word “in” is a bit tricky. Depending on timing, this can be as short as six years and two days, so careful tracking is key. For example, if someone is in the US for the last day of year one, all days for years 2 through 7, and the first day of year 8, they are “in” the US for 8 of the last 15 years. Exceptions exist — like dual citizens who’ve lived outside the US most of their lives — but they’re rare.
Who’s Exempt?
- Individuals who do not meet any of the three thresholds above
- Dual citizens from birth meeting IRS residency and filing conditions (e.g., taxed as residents elsewhere and compliant for five years).
How to Calculate the US Exit Tax
The IRS treats all assets as if you had sold them for their fair market value on the day before you renounce your citizenship. This is known as a “deemed sale,” or a pretend sale. Capital gains tax applies to the difference between this value and your cost basis (what you paid). To calculate this, simply take the asset’s fair market value and subtract the cost basis.
For example, let’s say you purchased stock at $200,000. The day before you renounce your citizenship, that same stock is valued at $500,000. The difference between the two is $300,000, which the IRS would treat as a deemed sale, taxing you on that unrealized gain even though you did not actually sell any stock.
However, a sizable exemption exists. In 2024, the first $866,000 in gains is exempt. In the example above, the full $300,000 gain would be exempt. Larger portfolios, however, could trigger liability at capital gains rates (typically 15–20%).
The exemption amount tends to increase slightly each year, and for 2025, it is $890,000.
This gets tricky with retirement accounts or foreign pensions, where deemed distributions might apply instead. Always consult a tax pro — mistakes can be costly.
Can You Avoid Paying the US Exit Tax?
Legal strategies can reduce or eliminate the tax even if you qualify as a covered expatriate.
- Gifting assets: Transfer assets to a spouse or others before renouncing to drop below the $2 million net worth threshold. (Only your individual net worth counts.)
- Timing: Renounce before your net worth hits $2 million or your income exceeds the threshold.
- Dual citizenship: If you’re a dual citizen from birth, live abroad, and meet IRS filing rules, you might avoid the tax entirely.
- Foreign tax credits: Offset some liabilities if you’ve paid taxes abroad on the same gains (though this option is limited post-renunciation).
These strategies must be done 100% legally, with all proper procedures followed. Tax evasion penalties are severe.
If the exit tax feels too high, reconsider renouncing. You’d still file annual returns, but most expats owe little thanks to credits like the Foreign Earned Income Exclusion. A tax expert can weigh your options.
What If I’m Behind on My US Tax Returns?
Every US citizen must file an annual tax return, no matter where they live. If you are behind on filings, you must catch up before renouncing or becoming a covered expatriate.
Fortunately, the IRS offers help. The two main options are the Streamlined Filing Compliance Procedures and the Voluntary Disclosure Program.
- Streamlined Filing Compliance Procedures: For non-willful errors. Using this method, you must file three years of delinquent tax returns and six years of FBARs, self-certifying that your failure to file was accidental. There are no penalties as long as the IRS has not already contacted you about your failure to file.
- Voluntary Disclosure Program: This program is for those who have intentionally refused to fulfill their tax obligations. If you disclose your refusal now, it may reduce your penalties, though likely not erase them as it would with non-willful failure.
Non-compliance triggers the exit tax, even if you’re under the net worth or income thresholds. If you’re behind on your taxes, act fast. You will lose your chance for amnesty if the IRS contacts you first.
FAQs About the US Exit Tax
How much is the US exit tax?
The amount varies by asset value and gains. Capital gains rates (15–20%) apply to taxable amounts above the $866,000 exemption for 2024. (for the 2025 tax year, it is $890,000)
Does the exit tax apply to all expats?
No, it only covered expatriates who met the net worth, income, or compliance criteria. (See above.)
Will I owe back taxes?
You may. However, most expats can use the Foreign Tax Credit or the Foreign Earned Income Exclusion to reduce or eliminate their US tax bill. If you owe back taxes, interest will accrue until the balance is paid.
Can I return to the US after renouncing?
Yes, but you’ll need a visa. Immigration rules may also tighten for ex-citizens, so be prepared for complicating factors.
Do You Need Help with Your Expat Taxes?
For Americans living overseas, the Streamlined Filing Compliance Procedures provide a penalty-free way to catch up on your taxes. However, accuracy is essential. Even a minor mistake could trigger audits or further IRS inquiries. That’s where Greenback Expat Tax Services can help.
Click below to schedule a consultation with one of our expat tax experts. Alternatively, contact us, and one of our Customer Champions will be happy to help.
