US Exit Tax: The Cost of Renouncing Citizenship

Renouncing U.S. citizenship is a big step—whether you’re making a fresh start in a foreign country, simplifying your federal tax obligations, or just ready to cut through the paperwork that comes with holding a U.S. passport. But before you go, there’s one last thing to consider: the U.S. exit tax.

Designed to tax unrealized gains, the exit tax, also known as the expatriation tax, treats expatriation as a deemed sale, potentially leaving you with a significant tax bill. And it’s not just for billionaires—high-net-worth individuals, long-term Green Card holders, and those who haven’t kept up with U.S. tax filings may also be affected.

So who has to pay? How is it calculated? And most importantly, is there a way to reduce or avoid it? Here’s what you need to know before making it official.

What is the US exit tax?

The U.S. exit tax is a final tax bill imposed on individuals who renounce their U.S. citizenship or long-term Green Card holders who give up their resident status. Introduced in 2008, it ensures that those leaving the U.S. settle their tax obligations before cutting ties, particularly if they’ve accumulated significant wealth while under the internal revenue code.

The tax applies as if you sold all your assets at fair market value the day before expatriation, even if you’re not actually selling anything. This means you could owe taxes on unrealized gains—the increase in value of your investments, real estate, or other assets over time.

Beyond taxing unrealized gains, the exit tax can also apply to certain income sources tied to the U.S., such as deferred compensation, specified tax-deferred accounts, and trust distributions. For those considering expatriation, these additional tax liabilities make careful planning essential.

Who has to pay the US exit tax?

Not everyone who renounces U.S. citizenship or gives up a long-term Green Card owes the exit tax. It only applies to covered expatriates—those who meet certain financial or compliance criteria. If you meet any of the three IRS tests, you could be on the hook:

1. Net Worth Test

You qualify as a covered expatriate if your net worth is $2 million or more at the date of expatriation.

• Net worth includes real estate, investments, retirement accounts, businesses, and other assets minus liabilities like mortgages, loans, and credit card debt.
• If you own high-value assets but also have significant debt, only the net value of your holdings counts toward the threshold.

2. Tax Liability Test

Even if your net worth is under $2 million, you may still owe an exit tax if your average annual net income tax liability for the five years before expatriation exceeds a set threshold.

• For 2025, the threshold is $206,000 (adjusted annually for inflation).
• This amount refers to the total U.S. tax owed, not taxable income.

3. Tax Compliance Test

Even if you don’t meet the net worth or tax liability test, you’ll still be considered a covered expatriate if you fail to certify that you’ve been fully tax-compliant for the past five tax years before expatriation.

• This certification is done on Form 8854 (Initial and Annual Expatriation Statement).
• Failing to file Form 8854 automatically makes you a covered expatriate, even if you wouldn’t otherwise qualify.

Exit tax for Green Card holders

If you’re a long-term Green Card holder thinking about giving up your U.S. status, you might assume the exit tax only applies to citizens. But for some Green Card holders, it’s very much on the table.

Here’s the key rule: If you’ve had a Green Card for at least 8 of the last 15 years, you’re considered a long-term permanent resident in the eyes of the IRS. That means if you choose to relinquish your Green Card, you could be subject to the same exit tax rules as someone renouncing U.S. citizenship.

But timing matters. The exit tax is only triggered when you formally abandon your Green Card by filing Form I-407. If you give it up before reaching the 8-year mark, you can avoid this tax law altogether.

For those planning to leave the U.S. tax system, strategic timing and careful planning can make all the difference in minimizing your tax implications—or avoiding them entirely.

Other exceptions to the exit tax

Even if you’re classified as a covered expatriate, certain exemptions may allow you to avoid paying the exit tax. These exceptions are particularly relevant to individuals who have had little or no real connection to the U.S., such as Accidental Americans—those who acquired U.S. citizenship at birth but never lived in the country long-term.

Dual Citizenship at Birth

If you were born a dual citizen, you may be able to avoid the exit tax—but only if:

• You still hold citizenship in your other country at the time of expatriation.
• You have been a U.S. resident for no more than 10 of the last 15 years (as defined for tax purposes).

Minors Who Renounce Before 18½

Minors who renounce before turning 18½ can also be exempt from the exit tax, as long as they:

• Have not been a U.S. resident for more than 10 years.

These exceptions recognize that some individuals may have U.S. citizenship on paper but little actual connection to the country. For those who qualify, they provide a way to renounce without the financial burden of exit tax.

How is the US exit tax calculated?

If you’re classified as a covered expatriate, the IRS treats your expatriation as if you sold all your assets at fair market value the day before renouncing, even if no actual sale takes place. This means you could owe taxes on unrealized gains—the increase in value of your investments, real estate, and other assets over time.

Step 1: Determine your net worth

Your net worth includes the total value of all worldwide assets—real estate, investments, retirement accounts, businesses—minus any liabilities like mortgages or loans. If your net worth is $2 million or more, you meet the first threshold for covered expatriates.

Step 2: Calculate unrealized gains

For each asset, subtract its adjusted cost basis (original purchase price plus any improvements) from its fair market value (FMV) at the time of expatriation.

Step 3: Apply the exclusion amount

The IRS provides an exclusion to reduce taxable gains. In 2025, the first $890,000 of unrealized gains is exempt from taxation. Any gains beyond this amount are subject to tax.

Step 4: Determine Your exit tax liability

Most assets are taxed at the long-term capital gains tax rate of 20%, with an additional 3.8% net investment income tax potentially applying.

Example Calculation

Let’s say you own stock currently worth $2 million, which you originally purchased for $500,000:

• Unrealized gain: $2,000,000 – $500,000 = $1.5 million
• Exclusion amount (2025): $890,000
• Taxable gain: $1,500,000 – $890,000 = $610,000
• Exit tax liability: $610,000 × 20% = $122,000 (plus any applicable investment tax)

For example, if you own a property worth $1 million with a $700,000 mortgage:

• Net worth calculation: $1,000,000 (Property FMV) – $700,000 (Mortgage) = $300,000 (counts toward your net worth)
• Exit tax calculation: The IRS considers the full $1,000,000 FMV when calculating unrealized gains—the mortgage is not subtracted.

Planning ahead is key to minimizing your tax burden and avoiding surprises when renouncing U.S. citizenship or giving up a long-term Green Card.

Strategies for minimizing the exit tax

The U.S. exit tax can be costly, but with careful planning, you can reduce its impact—or even avoid it altogether. The key is to lower your taxable net worth and manage your assets strategically before renouncing. Here are some of the most effective ways to do that.

1. Reduce Your net worth

Since the $2 million net worth threshold is one of the main criteria for triggering the exit tax, reducing your assets below this limit before expatriation can make a big difference.

• Gift assets to family members or trusts to bring your net worth below $2 million, keeping in mind U.S. gift tax rules and thresholds.
• Transfer assets to a non-U.S. spouse to remove them from your taxable estate.

2. Sell assets while still a U.S. tax resident

If you plan to sell highly appreciated assets, doing so before expatriation allows you to take advantage of exclusions and tax credits available to U.S. residents.

• Primary residence exclusion: If you sell your primary home before renouncing, you may qualify for the capital gains exclusion—up to $250,000 for single filers and $500,000 for married filers.
• Tax-loss harvesting: If you have underperforming investments, selling them at a loss before renouncing can help offset taxable gains.

3. Donate to charity

Charitable giving can help reduce both net worth and taxable gains. Donating highly appreciated assets (such as stocks) to a qualified charity before expatriating can lower your net worth while also avoiding capital gains tax on those assets.

4. Time your renunciation carefully

When you renounce can significantly affect your tax liability.

• Green Card holders: If you’ve held a Green Card for 8 of the last 15 years, you’ll be subject to exit tax rules. Renouncing before hitting that threshold can help you avoid it.
• Strategic spending or gifting: If your net worth is close to $2 million, reducing it through spending, gifting, or donating before expatriation can help you stay below the threshold.
• Avoid asset appreciation: If you expect a significant increase in your assets’ value, renouncing before appreciation occurs can reduce taxable gains.

While these strategies can help reduce or eliminate your exit tax liability, expatriation planning is complex. Consulting with a tax professional or financial advisor who specializes in expatriation is the best way to ensure compliance and maximize your tax efficiency.

Filing Form 8854: The final step in renunciation

Once you’ve made the decision to renounce U.S. citizenship or relinquish a long-term Green Card, there’s one final step: filing Form 8854 (Initial and Annual Expatriation Statement). This form is essential—it confirms your tax compliance and determines whether you owe the U.S. exit tax.

• Why it matters: Filing Form 8854 isn’t just a formality; it protects you from future tax liabilities and ensures that you’re officially classified as a non-U.S. taxpayer.
• What it includes: The form collects detailed information about your net worth, income tax liability, and asset documentation to determine whether you meet the covered expatriate criteria.

Before renouncing U.S. citizenship, you must file a final income tax return, which includes Form 8854 to certify tax compliance and determine any exit tax liability.

• Form 8854 is due the same day as your U.S. tax return—typically April 15.
• If you’re living abroad, you may qualify for an automatic extension to June 15.
• If you file for a tax return extension (Form 4868), the deadline extends to October 15.

What happens after renunciation?

A U.S. person who renounces citizenship or relinquishes a long-term Green Card is no longer taxed on worldwide income but may still have tax obligations even after expatriation.

• U.S.-sourced income: Earnings from U.S. rental properties, dividends, bequests, or other U.S. assets may still be subject to withholding taxes.
• Re-entry to the U.S.: You can visit with a visa or ESTA, but entry is not guaranteed.
• Citizenship is final: Renouncing is permanent, and regaining U.S. citizenship is nearly impossible.

Seamlessly navigate the US exit tax with Bright!Tax

Renouncing U.S. citizenship or relinquishing a Green Card comes with complex exit tax obligations. At Bright!Tax, we help expats determine if they qualify as covered expatriates and develop personalized strategies to minimize tax liability. Let our expert CPAs create a tailored tax plan so you can move forward with confidence.

US Exit Tax FAQs