You Can’t Take It (All) With You: The U.S. Exit Tax

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May 9, 2025

You Can’t Take It (All) With You: The U.S. Exit Tax

The United States subjects all of its citizens, wherever they live, and non-citizens who are residents of the U.S., to income tax on their worldwide income. As a corollary to that policy, the U.S. imposes an “expatriation” tax, also sometimes called the “exit” tax, when an individual stops being a U.S. taxpayer by renouncing their U.S. citizenship or giving up their green card. This is a tax provision that requires careful consideration for U.S. taxpayers who want to relocate.¹

What Is the Expatriation Tax?

The expatriation tax treats a taxpayer who is a covered expatriate as having sold all of their assets (other than certain tax deferred or retirement accounts described below) for fair market value on the day before the date of expatriation. Gains and losses that would be generated by such a sale are subject to tax in the year of expatriation, though up to $890,000 of gain on this deemed sale is excluded from income in 2025.

What Does It Mean to Expatriate?

For a U.S. citizen, expatriation means formal relinquishment of citizenship. This can be accomplished by:

• Appearing before the appropriate diplomatic or consular official to renounce in person;
• Delivering to the U.S. State Department a written statement of voluntary relinquishment of citizenship;
• A court revocation of your naturalization if you were not born a U.S. citizen; or
• The State Department issuing a certificate of loss of nationality.

Long-term lawful permanent residents who are not citizens are also subject to the expatriation tax rules when they cease to be lawful permanent residents, usually by relinquishing a green card or having their status terminated by the State Department. Long term permanent residents are those who have resided in the United States in eight of the 15 tax years preceding loss of lawful permanent resident status.

Who Is Subject to the Expatriation Tax?

The tax applies to covered expatriates (U.S. citizens who renounce their citizenship and long-term U.S. residents who give up their green cards and terminate U.S. residency) who also:

• Have a net worth on the date of expatriation or termination of residency of $2 million or more; or
• Have an average annual net income tax for the preceding five years that exceeds a statutory limit, which is indexed for inflation. For 2025, that income tax threshold is $206,000; or
• Do not certify on IRS form 8854 that they are in compliance with all U.S. federal tax obligations for the preceding five years.

What Are the Exceptions?

There are a few exceptions to this basic rule. The first exception is for individuals who (a) at birth obtained citizenship in the U.S. and in another country, (b) after expatriation remain a citizen of the other country, and (c) have had no significant contacts with the U.S. To qualify for this exception, the taxpayer must have been a resident of the U.S. for fewer than ten of the 15 years prior to expatriation.

The second exception is for taxpayers with dual citizenship who expatriate prior to age 18½. Those taxpayers are not subject to the expatriation tax as long as they have not been resident in the U.S. for more than ten tax years preceding the date of expatriation.

Does the Tax Apply to Retirement Benefits or Other Tax Deferred Accounts?

Two types of tax-deferred accounts are excepted from the “mark to market” approach applicable to the other assets of a covered expatriate. The first type are “specified deferred accounts,” which includes all types of IRAs (including inherited IRAs, Roth IRAs, and rollover IRAs), as well as 529 plans, ABLE accounts, and certain similar arrangements. These assets are treated as if they were distributed in full on the day before the expatriation date. However, no early withdrawal penalty is imposed. Following the deemed distribution and the payment of tax, the taxpayer’s basis is adjusted, which will impact the taxation of future distributions.

The second type are eligible deferred compensation items. These include qualified plan accounts such as 401(k) or 403(b) plan accounts, pensions, profit sharing, deferred compensation, and certain equity-based compensation plans. As long as the plan is provided by a U.S.-resident employer, the expatriating taxpayer can elect to have a 30% tax withheld by the payor at the time assets are distributed from the plan, paying no tax at the time of expatriation. This means the tax deferral can continue. In order to qualify for this treatment, the expatriating taxpayer must file an election with the plan sponsor and agree to waive any treaty provisions that would otherwise apply.

For deferred compensation that is not eligible for this treatment (for example, where the expatriate has not elected to defer the tax or agreed to waive the treaty provisions), the expatriating taxpayer is treated as having received a distribution of the present value of the taxpayer’s rights under the plan on the day before the date of expatriation and is subject to tax on those amounts.

When Is the Expatriation Tax Paid?

A taxpayer can defer paying the capital gains tax on marking their assets to market until an actual sale is made. However, this will require an individual agreement with the IRS, bond, or other security, and filing returns until the tax is paid. Otherwise, the tax is due with the taxpayer’s return for the tax year in which expatriation occurs.

Does Paying the Expatriation Tax Mean Never Owing Further U.S. Income Tax?

Expatriates are taxed as non-resident aliens. Thus, their U.S. income will be taxed even if they are no longer residents. As noted above, deferred compensation and similar retirement assets owned at the time of expatriation will have income tax withheld from them when they are paid out. Distributions from U.S. non-grantor trusts may also be subject to tax/withholding.

How do you plan For the Expatriation Tax?

Taxpayers considering expatriation should review these rules carefully with their tax advisors. As the rules show, when you acquired citizenship and how much time you have spent in the U.S. also impact whether or not you are a covered expatriate, so thinking about it in advance can let you plan around those rules. It may be possible to structure assets or taxable income to fall below the threshold for the application of the tax, for example, by accelerating expenses (conversion to a Roth IRA is an example), timing the expatriation to follow a series of capital losses, or making gifts. Liquidity analysis is important to decide whether or not to defer any of the tax and how to pay any tax that cannot be deferred. A lot will depend on the tax regime of your new country of domicile — your tax advisors can show you the amount of tax you would owe as a U.S. citizen or resident versus that payable as an expatriate to determine which is the best course of action.