US Exit Tax Explained: What Happens When Americans Leave
Understanding the expatriation tax and its implications for your global strategy
What Is the Exit Tax?
The US exit tax (formally the expatriation tax under IRC Section 877A) applies to certain US citizens who renounce citizenship and certain long-term permanent residents who give up their green cards. It treats you as if you sold all your worldwide assets at fair market value on the day before your expatriation date.
This is a mark-to-market tax. If the deemed gain on your assets exceeds the exclusion amount ($866,000 for 2023, adjusted annually for inflation), you owe capital gains tax on the excess.
Who Is a “Covered Expatriate”?
You are a covered expatriate if you meet ANY of the following three tests:
- Net worth test: Your net worth is $2 million or more on the date of expatriation
- Average tax liability test: Your average annual net income tax for the 5 years ending before expatriation exceeds a threshold amount ($190,000 for 2023, adjusted annually)
- Certification test: You cannot certify under penalty of perjury that you have complied with all US tax obligations for the 5 preceding years
If you are a covered expatriate, the exit tax applies.
How the Exit Tax Works
The exit tax uses a “mark-to-market” approach:
- All your worldwide assets are treated as sold at fair market value
- Gains are calculated on each asset
- An exclusion amount applies (adjusted annually)
- Net gains above the exclusion are taxed at applicable capital gains rates
- Certain deferred compensation and specified tax-deferred accounts have separate rules
Planning Considerations
Strategic planning well before expatriation can significantly reduce or eliminate the exit tax impact. This may include gifting strategies, charitable giving, harvesting losses, and timing of the expatriation date. Always work with qualified cross-border tax professionals.
Important Disclaimer
This overview is for educational purposes only. The exit tax is complex and fact-specific. Tax laws change frequently. Consult with a qualified cross-border tax attorney or CPA before making any decisions about expatriation.