For high-net-worth U.S. citizens considering expatriation, the U.S. exit tax can come as a shock. It’s not just about filing paperwork and handing in a passport—renouncing your citizenship can come with a hefty tax bill on your unrealized gains.
If you’re planning to relocate permanently or have already settled abroad, it’s crucial to understand how the U.S. Exit Tax works, who it affects, and what you can do to plan ahead.
Dimov Tax helps global clients reduce their tax exposure and avoid costly mistakes during the renunciation process.
What Is the U.S. Exit Tax?
The exit tax, formally known as the “Expatriation Tax,” is a capital gains tax imposed on certain individuals who renounce their U.S. citizenship or give up their green card after long-term residence.
Here’s how it works:
- Deemed sale of assets: You’re treated as if you sold all of your worldwide assets on the day before you expatriate.
- Exclusion threshold: In 2025, the first ~$850,000 of capital gains is excluded (adjusted annually for inflation).
- Taxed on net gain: Any unrealized gains above the exclusion amount are taxed as if you actually sold your assets.
This means that even though you didn’t cash out, the IRS still wants its share.
Who Is Considered a “Covered Expatriate”?
Not everyone who gives up their citizenship or green card is subject to the exit tax. Only those who meet one or more of the following criteria are considered “covered expatriates”:
- Net worth of $2 million or more on the date of expatriation
- Average annual net income tax liability over the past 5 years exceeds a certain threshold ($201,000 in 2024; indexed annually)
- Non-compliance with IRS filing. If you fail to certify under penalty of perjury that you’ve complied with all federal tax obligations for the last five years
If you meet any of these, you may owe the exit tax—unless you qualify for one of the exceptions.
Exceptions to the Exit Tax Rule
The IRS offers narrow exceptions to being classified as a covered expatriate:
- Dual citizens from birth: If you hold another citizenship from birth and have not lived in the U.S. for more than 10 of the last 15 years, you may avoid the exit tax.
- Minors: Those who renounce before age 18½ and haven’t lived in the U.S. for more than 10 years may also be exempt.
- Green card holders with limited U.S. presence: If you’ve held a green card for less than 8 of the last 15 years, the exit tax may not apply.
Dimov Tax helps clients determine if they qualify for an exception and builds documentation that supports their case.
What Assets Are Subject to the Exit Tax?
If you’re considered a covered expatriate, nearly all of your assets are subject to the deemed sale rule. This includes:
- Investment portfolios (stocks, bonds, mutual funds)
- Real estate, even if located outside the U.S.
- Private business interests
- Deferred compensation plans (such as 401(k)s or foreign pensions)
- Non-grantor trusts you’re a beneficiary of
Special rules apply to retirement accounts and deferred income. Some may be taxed immediately, while others face 30% withholding when distributions are made.
How Is the Exit Tax Calculated?
The IRS calculates your tax as if you sold all your assets the day before renunciation. Here’s how:
- Determine fair market value (FMV): Appraise each asset as of your expatriation date.
- Subtract your basis: Calculate your capital gain by subtracting your purchase price (basis) from the FMV.
- Apply the exclusion: For 2025, exclude the first ~$850,000 of capital gains.
- Tax the remainder: The rest is taxed using capital gains rates, typically 15% or 20%, depending on your income level.
This phantom gain can create a real tax liability—especially for those with long-held, appreciated assets.
Pre-Expat Planning Strategies
If you’re considering expatriation, tax planning should start well in advance. Here’s how Dimov Tax helps reduce your exit tax burden:
- Gift appreciated assets: Giving away assets before renouncing can reduce your net worth below the $2 million threshold.
- Set up offshore trusts strategically: Trust structures can sometimes shield assets from deemed sale treatment.
- Trigger gains early: Selling appreciated assets now may allow you to realize gains at lower tax rates.
- Evaluate deferral opportunities: In some cases, the IRS lets you defer exit tax with interest, if collateral is provided.
These strategies must be carefully timed and documented to avoid red flags during IRS review.
Exit Tax Reduction Strategies
| Strategy | Timing Required | Complexity | Potential Savings |
|---|---|---|---|
| Gift Assets Early | 12+ months | Low | High |
| Realize Gains Early | 6+ months | Low | Medium |
| Offshore Trust Setup | 18+ months | High | High |
| Tax Deferral Election | At filing | Medium | Low |
Filing Requirements and Key Forms
If you renounce your citizenship or long-term residency, you must file IRS Form 8854 to declare your status and calculate potential exit tax. Key steps include:
- Certify tax compliance for the past 5 years
- Disclose net worth, income, and asset valuations
- Report deemed sale calculations and apply the exclusion
Missing or misreporting information on Form 8854 can result in penalties—and failure to certify compliance may automatically make you a covered expatriate.
Common Mistakes to Avoid When Renouncing
Renunciation is permanent—and the tax consequences can be, too. Here are common errors to avoid:
- Failing to plan early: Waiting until after you’ve built substantial wealth limits your options.
- Assuming you’re exempt: Even dual citizens and green card holders can be caught off guard by exit tax rules.
- Using outdated valuations: Under- or over-reporting asset values can trigger audits and penalties.
- Not consulting a tax advisor: International tax law is complex. Mistakes are expensive.
Dimov Tax provides personalized strategies and full compliance support for those ready to exit the U.S. tax system.
The Emotional and Financial Impact of Expatriation
Renouncing U.S. citizenship isn’t just a tax or legal decision—it can be a deeply personal and emotional journey. Alongside the financial implications of the U.S. Exit Tax, individuals often face:
- Emotional ties to identity and heritage
- Complicated family dynamics (especially with mixed-citizenship households)
- Banking and travel limitations after losing U.S. citizen status
- Uncertainty about future tax obligations or reentry to the U.S.
Dimov Tax understands that expatriation isn’t just a transaction—it’s a transition. We work closely with clients to balance financial goals with personal values, ensuring you make informed decisions with clarity and confidence.
Dimov Tax Helps You Exit Smart—Not Just Exit
Renouncing U.S. citizenship is a life-changing decision. You shouldn’t have to navigate the exit tax alone. At Dimov Tax, we guide expats and long-term residents through every step of the process—legally minimizing tax burdens and avoiding IRS scrutiny.
Here’s how we help:
- Personalized analysis of your covered expatriate risk
- Accurate asset valuations and gain calculations
- Strategic pre-exit tax planning to reduce liabilities
- Filing Form 8854 and supporting documentation
- Coordinating with estate and immigration professionals
Whether you’re already abroad or planning a move, we can help you exit on your terms.
Frequently Asked Questions About U.S. Exit Tax
Do I have to pay U.S. exit tax if I renounce my citizenship?
Not necessarily. You only pay U.S. exit tax if you’re classified as a “covered expatriate.” This happens when you meet one of three criteria:
1. your net worth exceeds $2 million
2. your average annual tax liability over five years is above $201,000 (2024 threshold)
3. you can’t certify five years of tax compliance.
If you’re a dual citizen from birth who lived outside the U.S. for most of the past 15 years, or you renounce before age 18½ with limited U.S. residence, you might avoid the tax entirely.
How much will I owe in U.S. exit tax?
The exit tax treats you as if you sold all your worldwide assets the day before renunciation. You get to exclude the first $850,000 in gains (2025 amount), but anything above that gets taxed at capital gains rates of 15% to 20%.
So if your unrealized gains total $2 million, you’d pay tax on $1.15 million of that. The actual bill depends on your specific assets and how much they’ve appreciated since you acquired them.
Can I reduce my U.S. exit tax before renouncing?
Yes, but you need to plan ahead. Effective strategies include gifting appreciated assets to lower your net worth below $2 million, selling some investments early to realize gains at current rates, or setting up certain offshore trust structures.
You can also elect to defer the exit tax by posting collateral with the IRS, though this comes with interest charges. The key is starting these planning moves well before your renunciation date.
What happens if I don’t pay the U.S. exit tax?
The IRS doesn’t mess around with exit tax compliance. If you’re a covered expatriate and fail to file Form 8854 or pay what you owe, you face serious consequences. This includes ongoing tax obligations on US-source income at punitive rates, potential gift and estate tax issues for US citizen family members, and possible challenges with future US travel or business dealings. The renunciation process isn’t complete until you satisfy all tax obligations.
Ready to Take the Next Step?
The U.S. exit tax doesn’t have to be a roadblock. With the right strategy, you can leave the U.S. tax system legally and confidently. Let Dimov Tax show you how to preserve your wealth and peace of mind.
Schedule a confidential consultation with Dimov Tax today—and start planning your exit the smart way.