Expatriation Tax: Understanding the U.S. Exit Tax in 2025

If you’re a U.S. citizen or long-term green card holder thinking about giving up your status, you may face a little-known but potentially costly surprise: the U.S. exit tax (also known as the expatriation tax). 

This tax works like a final bill from the IRS. When you renounce, the U.S. treats it as if you sold all your assets the day before you give up citizenship or residency and then taxes you on the gains from that future “sale”. For some, this might not amount to much, but for wealthy individuals, entrepreneurs, or even dual citizens with investments abroad, it can be a serious financial hit. 

In this guide, we’ll break down the expatriation tax in plain terms: who it applies to, how it’s calculated, and what steps you can take to reduce or even avoid it. 

• What is the expatriation tax? 
• Who should pay the US exit tax? 
• How is the exit tax calculated? 
• U.S. Exit Tax for Dual Citizens 
• How to Avoid the U.S. Exit Tax 
• Reporting and Compliance Requirements 
• Financial and Legal Implications of the Exit Tax 

The expatriation tax is a special U.S. tax that applies when citizens or long-term Green Card holders give up their status, affecting their income tax liability. It is essentially a capital gains tax on all your worldwide assets, including unrealized gains (gains that have not yet occurred due to no sale happening) calculated as if you had sold them at fair market value the day before you became an expatriate. 

The reasoning behind this tax is tied to the U.S. worldwide taxation system and the ongoing tax obligations of citizens. Unlike most countries, the U.S. taxes its citizens and residents on all income, regardless of where they live at the time of getting that income. In an effort to prevent wealthy individuals from renouncing their citizenship solely to avoid future U.S. taxes on their worldwide income, the U.S. Congress passed the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008, which created the modern exit tax as we know it now. 

Before 2008, the U.S. had rules targeting expatriates, but they were weaker and make avoiding tax easier. The HEART Act changed that by introducing: 

• The covered expatriate classification. 
• The deemed sale mechanism for calculating tax. 
• Special rules for tax-deferred accounts and trusts. 

These changes made the exit tax much harder to sidestep. 

Not everyone who renounces U.S. citizenship or gives up a Green Card has to pay the exit tax, especially those who maintain lawful permanent resident status. It applies only if you’re classified as a covered expatriate, which is what determines your exit tax liability, on your expatriation date. 

You are a covered expatriate if you meet any of these three (3) criteria: 

1. Net worth test: Your net worth is $2 million or more on your expatriation date. 

2. Tax liability test: Your average annual net income for the five years before your expatriation date exceeds $206,000 (2025 figure, adjusted for inflation). 

3. Certification test (also known as the tax compliance test): You fail to certify on IRS Form 8854 that you have complied with all U.S. tax filing requirements and federal tax obligations for the five tax years before your expatriation date. This includes filing all tax returns and reporting obligations. 

Exceptions to the covered expatriate status 

Some individuals are exempt, even if they meet the above criteria: 

• Having dual citizenship at birth: If you were born a U.S. citizen and are also a citizen of another foreign country, and you’ve also not been a U.S. resident for more than 10 of the last 15 years. 

• Minors: Those who renounce before the age of 18 and a half and have not been U.S. residents for more than 10 years of their life. 

When you give up U.S. citizenship or long-term residency in the United States, the IRS pretends that you sold everything you own the day before you leave. This is called the deemed sale rule. Even if you didn’t really sell anything, the IRS taxes you as if you did. 

To soften the blow of this deemed sale rule, the IRS lets you shield a certain portion of your unrealized gains from tax. In 2025, you can exclude about $890,000 of your gains. 

Only the value above that amount is taxed at normal capital gains tax rates. This is important because it means not everyone with assets automatically owes tax since smaller gains may fall entirely under the exclusion amount. 

The exit tax doesn’t just apply to U.S. property. It covers your entire global portfolio including homes, rental properties, stocks, bonds, businesses, and even certain trusts. If something has monetary value, it’s treated as sold for tax purposes. 

Retirement accounts and tax-deferred assets 

Retirement plans like IRAs or 401(k)s aren’t covered by the deemed sale rule. Instead, the IRS pretends you fully cashed them out the day before expatriation. 

That means the entire balance of these accounts may be taxable immediately. In addition, when you later do indeed withdraw from those accounts, you can potentially still face a withholding tax of up to 30%. 

Cash and bank accounts 

Cash itself isn’t taxed in the same way, since there’s no “gain” on money. However, it does count toward your overall net worth, which is one of the tests to see whether you’re a covered expatriate. 

In other words, while cash won’t trigger the deemed sale rule, having large amounts of it could still put you over the $2 million net worth threshold and put you at risk of needing to meet certain tax obligations. 

Trusts, businesses, and real estate 

• Trusts: If you’re a beneficiary of certain trusts, the IRS may withhold tax from future distributions. 
• Businesses: Your ownership shares in a company are treated as if sold on the date of expatriation. 
• Real estate: Both U.S. and foreign properties are included in the deemed sale calculation. 

Dual citizens may wonder if and how the exit tax applies to their particular situation. Those with dual citizenship are seen as exceptions but there are still rules and specific circumstances that need to be taken into account. 

Born as a dual citizen 

If you were born with dual citizenship (for example, with one U.S. parent and one parent that’s a citizen of a foreign country or born in a country that grants automatic citizenship by birth), you may be exempt from being treated as a covered expatriate. 

To benefit from this exception, both of the following conditions must be met: 

1. You must still be a citizen and tax resident of the foreign country of citizenship at the time you renounce U.S. citizenship. 
2. You must not have lived in the United States for more than 10 of the past 15 years. 

This takes into account that some people with U.S. citizenship may not hold or have strong ties to the United States despite their citizenship status. 

Naturalized dual citizens 

If you became a U.S. citizen later in life through naturalization, this exemption usually does not apply. 

For instance, someone born in France who later immigrated to the U.S. and became naturalized would typically face the standard exit tax rules if they renounced. 

Example in practice 

Let’s look at a Canadian-American person who was born in Toronto with one U.S. parent and one Canadian parent. 

If they grew up and lived most of their life in Canada, only spending brief amounts of time in the U.S., they may be able to renounce without being treated as a covered expatriate. 

On the other hand, if they spent significant years living full-time in the United States, they could still fall into the covered category and have to meet exit tax obligations. 

The most important way to avoid the expatriation tax is to make sure you are not classified as a covered expatriate. 

If you don’t meet the covered expatriate criteria, you can renounce your U.S. citizenship or Green Card without triggering any of the thresholds needed to meet any tax obligations. 

To stay outside of that category, you generally need to: 

1. Keep your net worth (meaning your total assets subtracted by your total liabilities) below $2 million. 
2. Keep your average annual tax liability below the IRS threshold (for example, for the year 2025 it is $206,000). 
3. Stay fully compliant with U.S. taxes and file Form 8854. 

Here are some ways you can avoid being a covered expatriate: 

Reduce net worth through gifting 

If your total net worth is close to or above $2 million, you can plan ahead by transferring assets before the date of your expatriation: 

• If your spouse is a U.S. citizen, you can give them an unlimited number of gifts (no threshold) to significantly reduce your net worth without triggering gift tax. 
• If your spouse is a non-U.S. citizen, you can still gift, but there is a tax-free limit of $190,000 (in 2025). 
• Gifting to children or other family members can also reduce your estate, but these gifts count against your estate/gift tax limits. 
• Making charitable donations can help lower your overall taxable estate by reducing potential gains on appreciated assets. 

This strategy requires careful planning because suddenly giving large gifts may raise red flags with the IRS. 

Manage income and time your expatriation 

Timing matters when it comes to exit tax. This is because one of the tests for covered expatriate status is what your average income tax liability over the past five years has been. 

• Renounce your U.S. citizenship during a window where you’ve had years of lower income or losses to keep your average annual net income below the threshold. 

• Sell appreciated assets (investments that increase in value over time like real estate or stocks) before renunciation to use deductions, exclusions (like the primary residence exclusion), and offset losses. 

• Sell investments at a loss to balance out capital gains and keep your taxable income low. 

Stay tax compliant 

Even if you’re under the net worth and tax liability limits, you will still be automatically treated as a covered expatriate if you fail the tax compliance test. 

• Provide proof that you filed all required U.S. tax returns for the five years prior to expatriation. 
• File IRS Form 8854 to certify your compliance and provide details of your assets and liabilities. 

If you are behind on tax filings, programs like the Streamlined Filing Compliance Procedures can help you catch up before you renounce. 

Special planning for Green Card holders 

Not only citizens but also long-term permanent residents (those who have had a Green Card for at least 8 of the last 15 years) are also subject to exit tax rules. But there are ways to avoid it: 

• Relinquish your green card before reaching the 8-year mark to avoid being treated as a long-term resident. 

• If you move to a foreign country that has tax treaties with the U.S., you may be able to use Form 8833 to elect to be treated as a non-resident for tax purposes. This election form can prevent a particular year from counting toward the 8 out of 15 years requirement. 

For example, a Canadian green card holder living primarily in Canada could use the treaty to avoid triggering U.S. tax residency in some years, thereby shortening their official “U.S. residency” period. 

The central form required according to exit tax law is the IRS Form 8854: 

• Certifies compliance with US tax returns for the previous 5 years. 
• Serves as a declaration of all assets and liabilities to calculate net worth. 
• Calculates deemed sale gains. 

Additional reporting obligations related to taxable income include: 

• FBAR (Report of Foreign Bank and Financial Accounts). 
• FATCA (Foreign Account Tax Compliance Act) disclosures. 

Penalties for non-compliance can be quite severe, including being permanently classified as a covered expatriate. 

Estate and inheritance taxes 

Covered expatriates who give gifts or bequests to persons with U.S. citizenship, including deferred compensation items (where an employer pays a portion of an employee’s earnings at a future date) face a special 40% transfer tax under Internal Revenue Code (IRC) §2801, which is separate from the estate tax system. 

Costs of renouncing citizenship 

• U.S. State Department renunciation fee: US $2,350. 
• Professional tax or legal advisory fees: Can often run several thousand dollars. 
• Potential deferred tax payment arrangements with IRS.