Understanding US Exit Tax: Do US Citizens Pay Exit Tax?

Yes, some US citizens and long-term residents may have to pay an exit tax when they give up their US citizenship or green card. This applies if they meet the IRS definition of a “covered expatriate.”

Designed to prevent wealthy taxpayers from renouncing ties to the US to avoid taxes, the exit tax has significant implications for expats, dual citizens, and long-term green card holders.

This article covers key questions and topics including:

• What is the US exit tax for expats?
• How is US exit tax calculated?
• What is the dual citizen exception for expatriation?
• Does US exit tax apply to green card holders?
• What happens if you abandon your green card?
• How do you avoid exit tax?

If you are looking to invest as an expat or high-net-worth individual, which is what I specialize in, you can email me (hello@adamfayed.com) or WhatsApp (+44-7393-450-837).

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What Is the Exit Tax for US Citizens?

The exit tax for US citizens is a financial obligation officially enacted under Internal Revenue Code §877A, the rule aims to ensure that wealthy individuals do not avoid taxation by renouncing their US status.

The tax functions as if the individual sold all their worldwide assets on the day before expatriation, even though no actual sale occurred.

What is a US-covered expatriate?

Not everyone who renounces US citizenship is subject to the exit tax.

Only those who meet one or more of the following criteria are classified as covered expatriates:

• Net worth of $2 million or more on the date of expatriation
• Average annual net income tax liability over the prior five years (indexed for inflation; approx. $201,000 in 2025)
• Failure to certify compliance with US tax obligations for the five preceding years via IRS Form 8854

Covered expatriates are the only individuals subject to the mark-to-market exit tax, which simulates a sale of assets and applies capital gains tax accordingly.

Even individuals who have minimal ties to the US but meet any of these criteria could trigger the exit tax.

That’s why it’s crucial to understand the full scope of the rule well before renouncing citizenship or relinquishing a long-term green card.

When Did the US Exit Tax Start?

The US exit tax in its current form was enacted as part of the HEART Act (Heroes Earnings Assistance and Relief Tax Act) of 2008.

While the concept of taxing individuals who renounce their citizenship isn’t new, the HEART Act significantly reshaped how the law is applied.

Prior to 2008, expatriation was governed under IRC §877, a rule introduced in 1966 and later modified in the 1990s to address tax-motivated renunciations.

The older law required ongoing US tax filings for 10 years post-expatriation for those deemed to have renounced citizenship to avoid taxes.

However, enforcement was weak, and the law was seen as both cumbersome and easy to sidestep.

The 2008 HEART Act replaced Section 877 with Section 877A, which introduced a more immediate and enforceable mark-to-market taxation model.

How Is Exit Tax Calculated in the USA?

The US exit tax is calculated under a mark-to-market regime, which means that all worldwide assets of a covered expatriate are treated as if they were sold the day before expatriation.

This triggers tax on any unrealized capital gains. This deemed sale includes:

• Stocks and securities
• Real estate
• Ownership interests in private businesses
• Collectibles and other valuable personal property

The resulting net gain is then subject to capital gains tax.

Tax is only applied to unrealized gains exceeding a specified exclusion amount. For example:

• In 2023, the exclusion was $821,000
• For 2024, it is $866,000

Fair market value must be assigned to all relevant assets at the time of expatriation, and accurate third-party appraisals may be necessary for illiquid holdings like private companies or real estate.

Treatment of Deferred Compensation, Trusts, and Pensions

Some assets are not subject to the mark-to-market rule but are treated separately under exit tax provisions:

• Deferred compensation plans (e.g., 401(k)s, IRAs) may be taxed as distributions or subject to a 30% withholding on future payments.
• Non-grantor trusts: Future distributions are taxed at 30%, and the trust itself may face complex reporting requirements.
• Specified tax-deferred accounts (like HSAs and Coverdell ESAs) are treated as fully distributed on the day before expatriation and taxed accordingly.

This means expatriates may face a significant tax burden on both their immediate and future income streams, especially if they’ve accumulated large balances in retirement or investment accounts.

How Much Is US Exit Tax?

The total US exit tax liability varies significantly based on an individual’s net worth, unrealized gains, and the nature of their assets.

To better understand how much one might owe, it’s helpful to look at a few illustrative examples.

Let’s consider a few simplified scenarios assuming the 2023 exclusion amount of $821,000 and long-term capital gains rates of 15% or 20% depending on income level:

1. Example 1: Moderate Net Worth
   • Net worth: $2 million
   • Unrealized gains: $900,000
   • Exclusion applied: $900,000 – $821,000 = $79,000 taxable
   • Tax owed at 15%: $11,850
2. Example 2: High Net Worth
   • Net worth: $10 million
   • Unrealized gains: $4 million
   • Exclusion applied: $4 million – $821,000 = $3.179 million taxable
   • Tax owed at 20%: $635,800

These examples show how even relatively modest unrealized gains can result in a substantial exit tax if they exceed the exemption.

US Exit Tax for Dual Citizens

Green Card Exit Tax: 8-Year Rule Explained

One important aspect of the US exit tax involves the treatment of long-term green card holders, often referred to under the 8-year rule.

This rule determines when green card holders become subject to the exit tax upon relinquishing their status.

What is a long-term resident for expatriation?

A long-term resident is defined as someone who has held lawful permanent resident status (a green card) in the US for at least 8 of the last 15 tax years prior to expatriation or surrendering their green card.

This status subjects them to the same exit tax rules that apply to US citizens when they give up their green card.

This designation is crucial because it means that even if a person is not a US citizen, they can still be treated as a covered expatriate and face exit tax liabilities based on their long-term residence in the US.

How to Avoid US Exit Tax

While avoiding the tax entirely may not be possible for everyone, certain strategies can help reduce or delay the tax burden.

One of the key criteria for being classified as a covered expatriate is having a net worth above $2 million or an average annual income tax liability exceeding a set threshold.

Therefore, reducing your net worth below this threshold before expatriation can help you avoid the exit tax.

This might involve:

• Gifting assets to family members or trusts well before the expatriation date
• Selling appreciated assets and paying capital gains tax earlier to lower unrealized gains
• Strategically shifting investments to reduce exposure to high-value assets

Maintaining full tax compliance is critical.

Failure to file all required tax returns can trigger covered expatriate status regardless of net worth or income.

Conclusion: Importance of Tax and Legal Guidance

Given the complexity and potential financial impact of the US exit tax, working with specialized tax advisors and legal professionals is essential.

Expert guidance can help you:

• Understand your specific exposure based on income, assets, and residency history
• Implement appropriate strategies to minimize tax liability
• Ensure all necessary forms, such as IRS Form 8854, are filed correctly and on time
• Navigate the nuances related to dual citizenship, green card status, and international tax treaties

Ultimately, avoiding or mitigating the US exit tax requires proactive, informed planning well before the decision to expatriate.

Early consultation with professionals increases the chances of a tax-efficient transition out of the US tax system.

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Adam is an internationally recognised author on financial matters with over 830million answer views on Quora, a widely sold book on Amazon, and a contributor on Forbes.