Exit Tax Explained: Why Many U.S. Expats Avoid It
If you’re a U.S. citizen or green card holder thinking about renouncing citizenship, one of the biggest concerns you’ll hear about is the exit tax. Many Americans abroad are surprised to learn that giving up citizenship doesn’t mean walking away tax-free. So, what is exit tax, and why do so many expats try to avoid it? Let’s break it down in simple terms.
What Is Exit Tax?
The exit tax is essentially a final tax bill the IRS imposes on certain individuals when they give up their U.S. citizenship or long-term green card. It treats your worldwide assets as if you sold them the day before expatriation—forcing you to pay taxes on unrealized gains.
Who Has to Pay Exit Tax?
You may be classified as a “covered expatriate” if any of the following apply:
- Net Worth Over $2 Million – Including property, retirement accounts, and investments.
- Average Annual U.S. Tax Liability – If it exceeds $201,000 (2024 threshold, adjusted yearly).
- Non-Compliance with U.S. Taxes – If you haven’t filed all required U.S. tax returns for the last five years.
If you meet any of these, you’ll likely face the exit tax.
How the Exit Tax Works
- Deemed Sale of Assets – The IRS assumes you sold all your assets the day before expatriation.
- Capital Gains Tax – You pay U.S. tax on the gains above the exclusion amount ($821,000 for 2024, indexed yearly).
- Retirement Accounts – Certain pensions, IRAs, and deferred compensation plans may be taxed immediately.
Why Many Expats Avoid the Exit Tax
- Strategic Planning – By reducing net worth below $2 million before renunciation, some expats avoid covered expatriate status.
- Tax Compliance – Staying compliant with IRS filings for five years can protect you from being classified as covered.
- Exemptions for Dual Citizens – Some dual citizens who lived mostly outside the U.S. may qualify for exceptions.
- Timing Renunciation – Choosing the right moment, such as before asset growth or inheritance, can reduce liability.
Practical Example
Imagine an American expat in London with:
- $1.5M in investments
- $1M home equity
- $500K in retirement accounts
Their net worth is $3M. Upon renunciation, the IRS treats these as sold. If gains exceed the exclusion, they could owe hundreds of thousands in taxes—even if they haven’t sold anything in real life.
FAQs
Does everyone pay the exit tax?
No. Only “covered expatriates” must pay it.
How much is the exit tax?
It depends on your assets, net worth, and gains. Some pay nothing; others face six-figure bills.
Can I avoid the exit tax legally?
Yes—through planning strategies like reducing net worth or staying tax compliant.
Do green card holders also face the exit tax?
Yes, if they’ve held a green card for at least 8 of the past 15 years.
What happens if I renounce without filing taxes first?
You’ll likely be considered non-compliant and face the exit tax automatically.
Conclusion
The IRS exit tax is a powerful deterrent against wealthy Americans giving up citizenship. Understanding what is exit tax helps expats prepare and, in many cases, avoid becoming a “covered expatriate.” With proper planning, you can minimize or even eliminate liability while securing a smoother path to renunciation.
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