What is the US exit tax?
Updated on October 10, 2025
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What is the US exit tax and how does it work?
Renouncing your US citizenship or giving up a long-term Green Card can be a big decision. For many Americans abroad, the phrase “exit tax” is what makes them hesitate.
The truth? Most expats never actually owe any exit tax, but understanding how it works is essential before you take the step.
Why does the US have an exit tax?
The exit tax is the IRS’s way of collecting tax on unrealized gains, the paper profits on assets that have grown in value while you were a US citizen.
Think of it as the IRS pretending you sold everything you own the day before you leave the system. The rule exists to stop wealthy individuals from accumulating large gains, renouncing citizenship, and avoiding tax entirely.
For many ordinary expats, though, it feels less like a fairness measure and more like a final hurdle. Even if you’ve lived abroad for years and paid tax locally, the U.S. may still want a final look at your global assets.
Who has to pay the US exit tax?
You’ll only owe exit tax if the IRS classifies you as a ‘covered expatriate.’ If you’re not covered, you can renounce or give up your Green Card without paying any exit tax.
Many assume that renouncing automatically triggers a huge tax bill, but that’s rarely the case. For most expats, once the calculations are done, which includes the US$890,000 exclusion for 2025, there’s often no tax due at all.
However, the IRS uses three tests to decide who’s covered.
Quick definition: What is a covered expatriate?
You’re a covered expatriate if any of the following apply on your expatriation date:
|
Test |
Threshold (2025) |
Description |
|
Net worth test |
US$2,000,000 |
Your worldwide net worth equals or exceeds US$2 million. |
|
Tax liability test |
US$206,000 |
Your average annual US income tax liability over the past five years exceeds US$206,000. |
|
Compliance test |
– |
You can’t certify on Form 8854 that you met all US tax filing and payment obligations for the past five years. |
Note: The US$2 million net-worth test isn’t indexed for inflation, so more expats may meet it over time as housing and investment values rise.
Are dual citizens or minors exempt?
Yes, in some cases. Dual citizens from birth and certain minors can avoid covered expatriate status if they meet both of the following:
- They were citizens of another country at birth and continue to hold that citizenship.
- They have been fully compliant with US tax filings for the past five years.
If both conditions apply, the exit tax does not apply, even if their net worth is above US$2 million.
Worried about exit tax? Let us help you navigate it.
How is the exit tax calculated?
If you’re a covered expatriate, the IRS applies a mark-to-market rule. It assumes you sold all your assets the day before you renounce. This is called a “deemed sale.”
Here’s the basic step-by-step process:
- Determine the fair market value (FMV) of everything you own.
- Subtract your cost basis (what you paid, adjusted for improvements or depreciation).
- Net all your gains and losses.
- Subtract the US$890,000 exclusion for 2025 (indexed each year for inflation).
- Apply US long-term capital gains rates, which are usually 15 to 20%, plus the possible 3.8% Net Investment Income Tax (NIIT).
📌 Key takeaway: Many expats find that, after applying the exclusion and offsetting losses, no exit tax is actually owed, even if they’re technically “covered.”
Exceptions to the “Deemed Sale” rule
Not every asset follows the mark-to-market calculation. Some have their own treatment:
- IRAs: Treated as if fully distributed the day before expatriation. Taxable as income, but no 10% early-withdrawal penalty.
- 401(k)s and employer pensions: You generally choose between:
- A flat 30% US withholding on future US-source payments, or
- Including the present-value lump sum in income immediately.
- Deferred compensation & foreign pensions: May require Form W-8CE and treaty-based elections.
- Non-grantor trusts: Have special withholding and recognition rules.
Because the treatment depends on the plan and treaty, professional advice is strongly recommended.
Example scenarios
Example A: Covered on net worth, but no exit tax due
Amelia, a US expat in London, owns property and has strong pension savings. Her net worth totals US$2.3 million, so she’s a covered expatriate.
However, after applying the US$890,000 exclusion, her deemed-sale gain drops to $0.
Result: Covered, but no exit tax due.
Example B: Covered by compliance failure
Ben’s net worth is US$1.7 million, and his average annual tax liability is well under US$206,000, but he missed filing two returns and a few FBARs.
He can’t certify compliance on Form 8854, so he’s covered due to the compliance test.
Result: Covered because of missed filings, not because of wealth or income.
How can you legally reduce or avoid the exit tax?
You can often reduce or completely avoid the exit tax with proper planning. The key is to stay out of covered expatriate status and time your expatriation strategically.
- Manage your net worth: If you’re close to US$2 million, reduce your taxable estate before renouncing:
- Gift assets to family members.
- Donate to charity.
- Pay down debts or restructure ownership.
- Manage your income tax liability: Spread large income events, such as sales or bonuses, over several years to stay below the US$206,000 average.
- Time your expatriation
- Green Card holders may renounce before reaching 8 of the last 15 years.
- Consider renouncing during a market downturn when asset values are lower.
- Watch exchange rates. Converting assets into USD can affect gains.
- Stay fully compliant: The compliance test is the easiest one to fail. If you’re behind, you can use the:
- Streamlined Filing Compliance Procedures for non-willful cases (no penalties) or
- Voluntary Disclosure Program for willful ones.
- Utilize foreign tax credits and treaties: Coordinating credits and treaty elections can help offset potential US liability, but only if planned in advance of expatriation.
Common myths about the exit tax
|
Myth |
Reality |
|
Everyone who renounces pays an exit tax. |
Only those who meet “covered expatriate” tests may owe. |
|
The exit tax taxes your income. |
The exit tax taxes unrealized capital gains, not your ongoing income. |
|
Renouncing always means a huge bill. |
Most expats owe nothing after exclusions and losses. |
What if you’re behind on US tax returns?
Even if your net worth is under US$2 million and your income is modest, being non-compliant can automatically cover you.
You have two main options:
- Streamlined Filing Compliance Procedures: For non-willful lapses. File 3 years of tax returns and 6 years of FBARs. No penalties if accepted.
- Voluntary Disclosure Program: For willful non-filers. Stricter, but sometimes necessary to avoid heavier consequences.
If you’re behind, get compliant before renouncing. That alone can prevent exit tax exposure.
Why proper planning matters
The US exit tax is designed to capture unrealized gains before you leave the system, but with smart planning, most expats can avoid paying it entirely.
Working with an IRS-licensed expat tax specialist helps you:
- Verify your five-year compliance.
- Estimate your potential exit tax liability.
- Identify gifting or timing strategies to reduce exposure.
- Handle pension and treaty complications correctly.
For most Americans abroad, the US exit tax looks scarier than it is. With good records and professional guidance, you can often renounce without paying a cent.
FAQs
-
What is the US exit tax rate?
There’s no single flat rate. Most pay 15 to 20% on long-term capital gains, plus a possible 3.8% Net Investment Income Tax.
-
Does the exit tax apply to Green Card holders?
-
Can dual citizens avoid the exit tax?
-
Can I return to the US after renouncing?
-
Do states have their own exit taxes?
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Do other countries have exit taxes?
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How does the exit tax affect retirement accounts?
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