U.S. Exit Tax: Key Considerations Before Giving Up U.S. Status
Some Americans living overseas eventually consider giving up U.S. citizenship or long-term green card status permanently. What many people don’t realize is that doing so can trigger the U.S. exit tax, one of the most complex areas of international tax law.
What Is the Exit Tax?
Under Internal Revenue Code Section 877A, covered expatriates are generally treated as if they sold their worldwide assets at fair market value the day before expatriation, even though no sale actually occurs. Any gain above an annual exclusion amount becomes taxable, often resulting in a significant one-time tax bill.
For 2026, the first $910,000 of gain (indexed annually for inflation) is generally excluded before the exit tax applies.
Who Is Affected?
A person may be subject to exit tax if they become a covered expatriate, generally by meeting one of these conditions:
• Net worth of $2 million or more
• Average annual U.S. income tax liability exceeding $211,000 (2026 amount) during the previous five tax years
• Failure to certify five years of full U.S. tax compliance
That last point surprises many people: simply being behind on filings can create problems when expatriating.
It’s important to understand that the risk isn’t limited only to people formally renouncing citizenship.
Americans living abroad who fall behind on their U.S. tax filings can also run into serious problems, since failure to stay compliant can cause someone to be treated as a “covered expatriate” if they later decide to expatriate.
IRS form 8854
Individuals who expatriate generally must file IRS Form 8854 to certify compliance and determine whether they are a covered expatriate.
Not every asset is treated the same. Deferred compensation, certain retirement plans, interests in nongrantor trusts, and some tax-deferred accounts are subject to special rules.
Because the exit tax is based on the value of worldwide assets immediately before expatriation, planning well in advance may reduce unexpected tax consequences.
Covered expatriate status can also have consequences after expatriation, including special U.S. tax rules for certain gifts or bequests made to U.S. citizens or residents.
Final Thoughts
Expatriation is not just an immigration decision, it can be a major tax event. Planning ahead and maintaining tax compliance can make a significant difference in outcomes.
If you are living abroad or considering giving up U.S. citizenship or long-term residency, understanding the exit tax rules before making a move is essential.
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation.