U.S. Exit Tax: Who Pays and How It’s Calculated

If you renounce U.S. citizenship or give up a long-term green card, the U.S. exit tax can apply if you meet the financial or tax-compliance tests for a “covered expatriate.” It can tax gains on assets you haven’t sold, while pensions and certain other arrangements have separate rules. But expatriating does not automatically mean you owe tax.

At Bright!Tax, we help people separate two questions that often get confused: whether they’re a covered expatriate and whether that status produces a tax bill. Your net worth matters, but so do your filing history, citizenship background and the assets you own.

What is the U.S. exit tax?

The U.S. exit tax is the expatriation tax that can apply when a covered expatriate renounces U.S. citizenship or ends long-term lawful permanent resident status.

The current rules under Internal Revenue Code section 877A apply to expatriations on or after June 17, 2008. Earlier expatriations fall under different rules. Simply moving abroad does not trigger this tax.

For most property, the IRS treats you as if you sold it at fair market value the day before expatriation. This is called the mark-to-market regime. If your property has appreciated, you can owe tax on that growth without receiving any sale proceeds.

Certain assets fall outside that calculation and receive separate treatment under section 877A:

Asset or arrangement	Exit-tax treatment
Most investments, real estate and business interests	Deemed sale under the mark-to-market rules
Eligible deferred compensation	Taxable payments are subject to 30% withholding, with notification and treaty-waiver requirements
Ineligible deferred compensation	The present value of the accrued benefit is treated as received before expatriation
Specified tax-deferred accounts	The entire account interest is treated as distributed before expatriation
Interests in nongrantor trusts	Special withholding rules apply to taxable distributions

These rules can cover foreign arrangements as well as U.S. ones. A pension does not escape the analysis simply because it sits outside the United States.

Who has to pay the U.S. exit tax?

Not everyone who expatriates becomes a covered expatriate. And covered status does not necessarily mean there will be tax to pay.

There are three tests to check:

Test	What triggers covered expatriate status for a 2026 expatriation?
Net worth	Net worth of $2 million or more on the expatriation date
Tax liability	Average annual net income tax liability above $211,000 for the five preceding tax years
Tax compliance	Failure to certify five years of federal tax compliance on Form 8854

Meeting any one of these tests can make you a covered expatriate. Qualifying dual citizens and certain young expatriates have exceptions to the first two tests, but must still meet the compliance-certification requirement.

1. Net worth test

Your net worth includes worldwide assets minus liabilities. That means looking beyond your bank balance to property, investments, retirement accounts, business interests and other assets.

Mortgages and other debts matter here because the test measures net worth, rather than the total value of everything you own.

Consider Priya, a U.S. citizen living in Singapore. She owns a home worth $1.4 million with a $600,000 mortgage and has another $700,000 in assets. With no other assets or liabilities, her net worth is $1.5 million.

She is below the $2 million threshold. Before concluding that she is not a covered expatriate, we would also check her tax liability and filing history—the same checks we make for our Bright!Tax clients.

2. Tax liability test

Even if your net worth is below $2 million, you can meet the tax-liability test.

For someone expatriating in 2026, the threshold is an average annual net income tax liability above $211,000 across the five preceding tax years: 2021 through 2025.

This is a tax-liability figure, not your income, the balance left to pay after withholding, or the amount you transferred to the IRS. The Form 8854 instructions explain the calculation, including subtracting the foreign tax credit from total tax.

3. Tax compliance test

You can become a covered expatriate even if you fall below both financial thresholds.

You must certify on Form 8854 that you complied with your federal tax obligations for the five preceding tax years. This includes applicable returns and payment obligations—not just filing five Forms 1040.

Failing to make the required certification means you fail this test.

Daniel’s situation illustrates why this matters. He lives in Spain, has a net worth of $850,000 and has U.S. income tax liability well below the threshold. But several returns remain unfiled. Before he can make the five-year certification, those outstanding obligations need to be resolved.

At Bright!Tax, we look at the filing history as carefully as the asset values. A small tax bill does not remove the compliance requirement.

Exit tax for green card holders

If you’re a long-term green card holder, giving up your status can bring the same expatriation-tax rules into play.

The key definition is lawful permanent resident status in at least eight of the last 15 tax years, ending with the year that status terminates. Qualifying years in which you were treated as a foreign resident under a tax treaty and did not waive the applicable treaty benefits are excluded.

Eight tax years can arrive sooner than eight full years.

For example, Kenji received his green card in December 2019 and plans to give it up in January 2026. Assuming every year counts and no treaty exclusion applies, his status touches eight tax years: 2019 through 2026. He can therefore be a long-term resident despite holding the card for just over six elapsed years.

The next question is whether he meets a covered expatriate test.

Green card situation	What it means
You move abroad but retain lawful permanent resident status	Moving alone does not end your U.S. tax residency under the green card test
Your physical card expires	Expiration alone does not terminate that status
You formally abandon status using Form I-407	This can establish a termination date
You claim qualifying foreign treaty residence and notify the IRS	This can end long-term residency for expatriation-tax purposes even without surrendering the card

Administrative or judicial termination can also establish an expatriation date. The IRS instructions explain these pathways.

For our Bright!Tax clients, we establish the legally effective termination date before calculating the tax consequences. The day you packed your bags is not necessarily the date that counts.

Other exceptions to the exit tax

Certain people are exempt from the net worth and tax-liability tests. These exceptions can be particularly relevant to people who acquired U.S. citizenship at birth but have spent little time in the country.

They do not remove the five-year compliance-certification requirement.

Dual citizenship at birth

You can qualify for the dual-citizen exception if:

• You became both a U.S. citizen and a citizen of another country at birth.
• At expatriation, you remain a citizen of—and are taxed as a resident of—that same other country.
• You were a U.S. resident for no more than 10 years within the 15-tax-year period ending with the expatriation year, measured using the substantial presence test.

Acquiring a second citizenship later does not meet the birth requirement.

Take Amélie, a U.S.-French citizen from birth who lives and is taxed as a resident in France. She has never lived in the United States and owns assets worth more than $2 million net of debt.

If she meets the dual-citizen exception and makes the required five-year compliance certification, the financial tests will not make her a covered expatriate. Her net worth alone does not settle the question.

This is why, at Bright!Tax, we check how and when someone acquired their dual citizenship, rather than assuming the same rules apply to every dual national.

Expatriation before age 18½

A separate exception applies to someone who:

• Expatriates before reaching age 18½.
• Was a U.S. resident for no more than 10 tax years before expatriation, measured using the substantial presence test.

The five-year certification requirement still applies.

Exception	Financial tests waived?	Five-year compliance certification required?
Qualifying dual citizen from birth	Yes	Yes
Qualifying person expatriating before 18½	Yes	Yes
Person who simply has little connection to the U.S.	No automatic exception	Yes

Being an “Accidental American” is not itself an exemption. The statutory conditions are what count.

How is the U.S. exit tax calculated?

Once covered status is established, the calculation depends on what you own.

For property within the mark-to-market regime, the starting point is the asset’s fair market value the day before expatriation, less its applicable adjusted basis. Separate calculations apply to the special categories described earlier.

Step 1: Determine your net worth and covered status

Your worldwide assets and liabilities establish whether you meet the net worth test. At Bright!Tax, we also check the tax-liability and compliance tests, along with any exceptions.

This step determines whether the exit-tax regime applies. It does not calculate the taxable gain.

Step 2: Calculate unrealized gains and losses

For each asset subject to the deemed-sale rules, establish:

• Fair market value the day before expatriation.
• Adjusted basis.
• The resulting gain or loss.

Adjusted basis is not always the original purchase price. Improvements, depreciation and other adjustments can change it. Certain assets held before someone first became a U.S. resident have special basis rules.

Step 3: Apply the exclusion amount

For 2026, the mark-to-market exclusion is $910,000. It is allocated among assets with gains under the IRS rules. Permitted losses are handled under the applicable loss rules.

The exclusion does not apply to the separate regimes for deferred compensation, specified tax-deferred accounts or nongrantor-trust interests.

Step 4: Determine the tax on the remaining gain

There is no single flat exit-tax rate. The rate depends on the character of the income or gain, with capital gains rules applying to appropriate assets. The net investment income tax can also apply.

Rosa’s investments show how the exclusion works. She lives in Portugal and is a covered expatriate. For this simplified calculation, assume she owns two long-held investments, has no other assets subject to the exit-tax calculation and has no losses.

Investment	Fair market value	Adjusted basis	Unrealized gain
Investment A	$1,500,000	$800,000	$700,000
Investment B	$1,000,000	$500,000	$500,000
Total	$2,500,000	$1,300,000	$1,200,000

After applying the $910,000 exclusion, $290,000 of gain remains. That is taxable gain, not a $290,000 tax bill. We would then apply the relevant tax rules and rates, taking the rest of Rosa’s return into account.

How mortgages affect the calculation

A mortgage reduces net worth, but it is not subtracted when calculating the property’s unrealized gain.

Suppose a property is worth $1 million, carries a $700,000 mortgage and has an adjusted basis of $600,000:

Calculation	Result
Net worth contribution: $1,000,000 − $700,000 mortgage	$300,000
Unrealized gain: $1,000,000 − $600,000 adjusted basis	$400,000

The mortgage answers the net worth question. Basis answers the gain question.

Strategies for minimizing the exit tax

Careful planning can reduce tax exposure or prevent covered expatriate status. But a strategy that addresses one test can leave another untouched.

1. Reduce your net worth

If you are close to $2 million, completed gifts or charitable donations before expatriation can affect the net worth test.

Gift-tax reporting and liability must be considered. A transfer to a trust does not necessarily remove the property from your net worth if you retain relevant ownership or interests.

Transfers to a non-U.S.-citizen spouse also require care. The annual exclusion for qualifying gifts to a noncitizen spouse is $194,000 in 2026; the unlimited marital deduction available for gifts to a U.S.-citizen spouse does not apply in the same way.

Reducing net worth below $2 million does not resolve a failed compliance test or an excessive five-year tax-liability average.

2. Review whether to sell assets before expatriation

A pre-expatriation sale can be useful when it allows you to use a benefit unavailable in the deemed-sale calculation. It can also generate tax sooner or affect the five-year tax-liability average, depending on timing.

For example, selling a qualifying main home can allow a home-sale gain exclusion of:

Filing situation	Maximum qualifying home-sale gain exclusion
Individual filer	$250,000
Married filing jointly, with the required conditions met	$500,000

Ownership, use and other requirements apply. Being married alone does not establish eligibility for the $500,000 exclusion.

Tax-loss harvesting can also offset gains, subject to the relevant loss limitations and wash-sale rules.

3. Donate to charity

An outright donation of suitable appreciated assets before expatriation can reduce net worth and remove those assets from the exit-tax calculation without realizing their appreciation.

Any charitable deduction depends on the recipient organization, the asset and applicable deduction limits.

For Bright!Tax clients who already intend to make charitable gifts, timing can be part of the planning conversation. Giving away an asset solely to avoid tax still means giving away the asset.

4. Time your expatriation carefully

Timing matters for several reasons:

• A green card holder can reach the eight-tax-year threshold before eight full years have passed.
• Asset appreciation can increase the deemed-sale gains.
• The five-year tax-liability average changes as a new year enters the calculation.
• Compliance problems need time to resolve.

Suppose Marcus in Germany has a large investment sale planned for 2026. If he expatriates in 2026, that year is outside the preceding five-year average. If he expatriates in 2027, it falls within that average.

The sale and expatriation still have their own tax consequences. At Bright!Tax, we assess those dates together, including the effect of foreign taxes, rather than treating the renunciation date as an isolated decision.

5. Consider payment deferral where appropriate

A covered expatriate can elect to defer payment of mark-to-market tax attributable to particular property. This is a payment arrangement, not a tax exemption.

The election requires adequate security and an irrevocable waiver of certain treaty rights. Interest accrues, and later events can bring the deferred tax due.

Filing Form 8854: Reporting your expatriation

Form 8854 reports your expatriation information and provides the required five-year tax-compliance certification. It collects financial details relevant to covered status and the tax calculation.

You file it for the expatriation year, usually alongside the applicable income tax return after that year ends. You do not file your expatriation-year return before renouncing.

If you have no income-tax-return filing requirement, Form 8854 still has its own filing requirement.

Which return and deadline apply?

A person who becomes a nonresident during the year often needs a dual-status return. Where the person is a nonresident at year-end, that commonly means Form 1040-NR with a statement covering the resident portion of the year.

Filing situation	Standard filing deadline for a calendar-year return	With a timely Form 4868 extension
Nonresident at year-end with wages subject to U.S. income tax withholding	April 15 of the following year	October 15
Nonresident at year-end without wages subject to U.S. income tax withholding	June 15 of the following year	December 15

Other filing situations can have different rules. The familiar overseas extension for U.S. citizens and residents should not automatically be applied to a former citizen’s nonresident return.

Form 8854 follows the applicable return deadline, including valid extensions. A Form 4868 filing extension does not extend the payment deadline.

Can filing obligations continue afterward?

Yes. Annual Form 8854 reporting can continue for covered expatriates who have deferred tax, eligible deferred compensation or an interest in a nongrantor trust.

Failing to file a required Form 8854, or filing one with missing or incorrect information, can lead to a $10,000 penalty, unless the reasonable-cause exception applies.

What happens after renunciation?

Once you are no longer a U.S. person for income-tax purposes, the United States no longer taxes you on worldwide income. Renouncing citizenship or surrendering a green card does not, however, prevent you from becoming a U.S. tax resident under another applicable test.

There are also continuing issues to consider:

Issue	What to keep in mind
U.S.-source income	Dividends, rents and other income can remain taxable; withholding and treaty rules depend on the income
Inheritances	A bequest is not ordinarily income subject to withholding, although inherited assets can produce taxable income
Gifts to U.S. recipients	Gifts or bequests from a covered expatriate can create section 2801 tax obligations for the recipient
Future visits	You need an appropriate visa or eligibility under the Visa Waiver Program; admission is not guaranteed
Citizenship	Renunciation is normally irrevocable, subject to limited exceptions and review procedures

The IRS explains the nonresident income rules and special rules for gifts from covered expatriates. The State Department explains the immigration consequences of relinquishing citizenship.

Understand your exit tax before making the decision

Renouncing citizenship or giving up a long-term green card does not automatically leave you with an exit-tax bill. The important work is establishing which rules apply, checking your compliance history and calculating the consequences for each type of asset before you act.

At Bright!Tax, we help U.S. taxpayers assess covered expatriate status, address outstanding filings and understand how their property, investments and retirement arrangements affect their potential liability.

Get help planning for the U.S. exit tax.

Frequently Asked Questions