Understanding the US Exit Tax When Renouncing US Citizenship

Renouncing your United States citizenship, or abandoning your status as a permanent resident, is not a decision to take lightly. While it does absolve you of US tax and reporting obligations, it’s a permanent, irrevocable decision that can pose significant complications — including financial ones.

Beyond having to pay an administrative fee of $2,350, certain Americans who renounce their citizenship or abandon their permanent residency will face steep exit taxes. But who exactly is subject to the US exit tax, what does it consist of, and how is it calculated? We’ll go over all of that and more below.

The exit tax: an overview

The US expatriation tax is most commonly referred to as the exit tax. In essence, it is an income tax placed upon high-net-worth individuals who renounce their US citizenship or abandon their long-term permanent US residency. The tax does not apply to what you own per se. Rather, you are treated as if you had sold all of your assets on the date of expatriation. The value of the sale is determined by the sum of the total fair market value of all qualifying assets.

Who may be subject to the exit tax?

Whether or not you are subject to the US exit tax depends on whether you are considered a covered expatriate or non-covered expatriate. 

Covered expatriates are subject to the exit tax. Non-covered expatriates are not.

Determining your exit tax status

The exit tax only applies to US citizens or long-term legal permanent residents who meet at least one of the following criteria:¹

• Have an average tax liability of $178,000 or greater over the past five years before expatriation
• Have a net worth of $2 million or more upon expatriation
• Have not certified tax compliance over the past five years before expatriation.

Anyone who does not meet the criteria above will be considered a non-covered expatriate, and will not need to pay the exit tax.

US exit tax for dual citizens & minors 

Even those who meet the aforementioned criteria, however, may be deemed non-covered expatriates in certain situations. Dual citizens, for example, are exempted from covered expatriate status if they:¹ 

• Were granted dual citizenship of another country at birth,
• Continue to be a citizen and tax resident of that same foreign country, and
• Lived in the US for no more than 10 years in the last 15 taxable years before their expatriation date.

Minors who expatriated before they were 18 and a half and lived in the US for no more than 10 tax years before their expatriation are also exempt.

Calculating the exit tax

The exit tax is typically levied using a mark-to-market regime, based on the deemed sale of your assets on the day before your expatriation.² Essentially, this means that you’ll be taxed as if you had sold all of your assets at a fair market value rate the day before you officially expatriated. 

Your theoretical gains are then taxed at a capital gains rate of 0% to 23.8%, according to how much taxable income you report that year.³

Mark-to-market exceptions

Certain assets are taxed differently than the mark-to-market regime:⁴

• Specified tax-deferred accounts (e.g. traditional & Roth IRAs, HSAs) & ineligible deferred compensation plans⁵ are taxed at a capital gains rate on the full value of the account the day before expatriation, with no early distribution penalties applied.
• Taxes on eligible deferred compensation plans will be automatically withheld at a rate of 30% on all taxable payments; in certain cases, a tax treaty may help waive this tax.
• Taxes on interests in non-grantor trusts are also withheld at a rate of 30% on all future taxable payments, with additional gains that exceed the basis also subject to taxation.
• Recipients of gifts from a covered expatriate before expatriation will pay a transfer tax of 18% to 41% on the value of the gift, depending on how much it was worth.

Paying the exit tax

Exit tax calculations are made on Form 8854. Keep in mind that each covered expatriate is allowed to exclude a certain amount of their deemed sale from taxation ($821,000 as of 2023).⁶ While the payment of your final exit tax is typically expected upon your date of expatriation, you may be able to defer it until the due date of your final US tax return if you provide adequate security (such as a bond).⁷

Renouncing US citizenship and the exit tax

For those subject to it, paying the exit tax is one of the last steps of officially renouncing US citizenship. From start to finish, this process involves:

1. Understanding the implications of renunciation⁸ and meeting the requirements
2. Gathering the required documents and scheduling an in-person appointment at your nearest US embassy or consulate
3. Attending the appointment to submit required documents, pay required fees and taxes, and take the oath of renunciation
4. Have your renunciation officially accepted & receive the “Certificate of Loss of Nationality”
5. File your final US tax return & certify that you’ve been tax compliant for the last five years 

US exit tax for Green Card holders: Exceptions & process

As mentioned earlier, US permanent residents who are not considered long-term residents — aka, those who have spent less than eight of the past 15 taxable years in the US before expatriation⁹ — are not subject to the exit tax.

Like US citizens who are considered covered expatriates, long-term residents considered covered expatriates must also pay the exit tax. Unlike US citizens, however, Green Card holders abandon their permanent residency vs. renouncing their citizenship. This involves:

• Downloading & completing Form I-407 
• Gathering the following documents:
  • Completed I-407 form
  • Green Card/form I-551, if available
  • Any other booklets and cards issued by USCIS
• Mailing required documents to the USCIS Eastern Forms Center

Considerations before renouncing citizenship or abandoning permanent residency

Renouncing US citizenship or abandoning permanent residency comes with pros and cons.

Both expatriated citizens and former permanent residents:

• Give up the ability to automatically enter, freely move within, and work in the US
• Surrender their right to US consular services abroad
• Risk higher taxes and complications on US-sourced income if they move back to the US as a non-resident alien¹⁰
• Face potential complications with US-based properties and investments, and
• Lose the ability to sponsor family members.

US citizens face additional consequences, such as forfeiting their right to vote and being unable to pass citizenship down to their children.

Because renouncing citizenship and abandoning permanent residency is permanent and non-revocable, regaining these rights and privileges would require applying from scratch.

Planning and compliance: tax strategies to save you money

With the proper tax strategy, it is possible to mitigate your exit tax liability. Some possible strategies include:¹¹

• Lowering your taxable income¹² to reduce the capital gains rate you’re subject to
• Selling assets in years leading up to expatriation, to realize capital gains over a number of years rather than in one fell swoop upon expatriation, ideally leading to reduced tax rates
• Engaging in tax-loss harvesting, which refers to selling assets to realize losses, timed to offset the impact of realized gains¹³
• Channeling ineligible deferred compensation funds into tax-deferred accounts

Before engaging in any of these strategies, though, you’ll want to consult expat tax and cross-border finance professionals. They’ll be able to not only help you identify which strategies are right for you but also successfully execute them.

1. Covered vs. Non-Covered Expatriate
2. Expatriation Tax (IRS)
3. Long-Term Capital Gains Tax Rate
4. How the US Exit Tax is Calculated for Covered Expatriates
5. IRS 457(b) – Eligible Deferred Compensation Plan
6. Tax Inflation Adjustments
7. What are the US Exit Tax Requirements
8. Renunciation of US Nationality Abroad
9. Definition of Long-Term Resident
10. How the US Taxes NRA Income After You Expatriated
11. How to Minimize the US Exit Tax
12. What are the Best Ways to Lower Your Taxable Income?
13. Tax-Loss Harvesting – Definition and Example
14. What are Some Ways to Minimize Tax Liability?