Understanding the U.S. Exit Tax: What You Need to Know Before Expatriating

Ricky Shoker
Aug 27
3 min read

For many individuals, especially those with international ties, the idea of giving up U.S. citizenship or a green card is a life changing decision. But before you take that step, it’s critical to understand one of the most significant and often misunderstood consequences: the U.S. Exit Tax.

At our firm, we work extensively with individuals navigating international and cross-border tax matters, and the exit tax is one of the most complex areas. This article breaks down what the exit tax is, who it applies to, and what steps you can take to minimize surprises.

What is the U.S. Exit Tax?

The exit tax is essentially a “deemed sale” tax imposed by the U.S. government when certain individuals give up U.S. citizenship or long-term permanent residency. Think of it this way: the IRS assumes that, on the day before you expatriate, you sold all your worldwide assets. You must then pay U.S. capital gains tax on any unrealized gains above a certain threshold (adjusted annually for inflation).

This tax can apply to everything from real estate and investments to retirement accounts and interests in businesses. It’s designed to prevent individuals from renouncing U.S. status simply to avoid paying taxes on appreciated assets.

Who is Subject to the Exit Tax?

Not everyone who gives up U.S. status faces the exit tax. The IRS has specific criteria that make you a “covered expatriate.” Generally, you are considered covered if you meet one of these conditions:

Net worth test – Your net worth is $2 million or more at the time of expatriation.
Tax liability test – Your average annual U.S. income tax liability for the prior five years exceeds a set threshold (around $201,000 for 2025, adjusted annually).
Compliance test – You fail to certify, under penalties of perjury, that you have fully complied with all U.S. tax obligations for the past five years.

If you meet any one of these tests, you may fall into the covered expatriate category and become subject to the exit tax rules.

How the Exit Tax Works

If you’re classified as a covered expatriate, the IRS requires you to calculate the hypothetical gain on your worldwide assets as though you sold them the day before expatriation.

The first $866,000 (for 2025) of gain is excluded from taxation.
Gains above that amount are taxed at applicable capital gains rates.
Certain assets, like deferred compensation and trusts, are subject to special rules and may result in immediate taxation at ordinary rates or mandatory withholding.

The mechanics can be complicated, and planning ahead is essential to avoid unpleasant surprises.

Actionable Tips to Prepare for the Exit Tax

If you’re considering renouncing U.S. citizenship or surrendering a green card, here are a few proactive steps to consider:

1. Understand Your Net Worth and Tax Exposure Early

Before making any decisions, calculate your assets, potential gains, and U.S. tax obligations. Many individuals are surprised at how quickly investments, real estate, and retirement accounts can push them over the $2 million threshold. A professional assessment can give you clarity.

2. Consider Strategic Gifting

Gifting assets before expatriation can reduce your net worth below the $2 million threshold, potentially helping you avoid covered expatriate status. However, gifting comes with its own U.S. gift tax considerations, so this must be done carefully and well in advance.

3. Review Tax Compliance for the Past Five Years

Even if your net worth and income tax liability are modest, failure to certify complete tax compliance automatically makes you a covered expatriate. Filing any missing returns or disclosures before expatriation is crucial.

4. Plan for Retirement Accounts and Trusts

Special exit tax rules apply to IRAs, 401(k)s, pensions, and foreign retirement plans. Similarly, if you are a beneficiary of certain trusts, distributions may face mandatory withholding. Reviewing these in advance can help you understand your future cash flow and tax burden.

5. Explore Timing and Residency Options

Sometimes, delaying or advancing expatriation can have significant tax benefits—such as waiting for a tax year with lower income or strategically relocating assets. Customized planning based on your personal and financial circumstances is key.

Why Professional Guidance Matters

The exit tax is not just a simple calculation—it’s a highly individualized process. One person may face little or no tax, while another may owe millions due to business holdings, appreciated stock, or real estate.

With international and cross-border considerations, such as assets held abroad, local tax laws, and potential double taxation, the complexity multiplies. This is why consulting with an experienced tax advisor is essential.

Ready to Take the Next Step?

If you’re considering giving up your U.S. citizenship or long-term green card, don’t go it alone. Our firm specializes in international and cross-border taxation, including U.S. exit tax planning. We help clients structure their assets, review compliance, and minimize unexpected tax burdens.

Book a confidential consultation today to discuss your unique situation and map out a clear plan before making any decisions.