Understanding The US Exit Tax

This article looks at the US Exit Tax, also known as the Expatriation Tax, a potentially costly pitfall for those planning on leaving the US for good.

We start with a brief overview of how the US Exit Tax works, what a “covered expatriate” means and the three ways they can trigger the tax. 

Finally, we look at ways to mitigate these risks so Uncle Sam can’t take one last bite of you before you go. 

Understanding The US Exit Tax

The US Exit Tax, also known as the Expatriation Tax, is a special tax levied against so-called “covered expatriates” – either long-term residents who give up their green cards, or citizens who renounce. 

Traditionally, residents, not citizens, paid the most exit taxes, and renunciation was a lot rarer, though that’s now changing with more and more Americans leaving the United States permanently.

Taxes and related practical considerations remain the top drivers of renunciation, though politics has now increasingly become a factor for US citizens to renounce. 

This should hardly be a surprise to anyone, regardless of their party affiliations. 

What can be a surprise, though – and a fairly nasty one – is finding out that our pals at the IRS have one last trick up their sleeves… 

How The US Exit Tax Works

So now let’s look at how the US Exit Tax works and how it might apply to you. 

First off, let’s say you have decided you’re leaving the US for good and have already secured your second citizenship. All that’s left now is to renounce.

If your income is deemed over the threshold to qualify you as a “covered expatriate”, so therefore you will need to pay the exit tax. 

What the IRS does in this case is treat all your worldwide assets as unrealised capital gains. 

In other words, it acts as though you had sold all of your assets on the day of your renunciation – your business, your real estate, stocks, bonds, crypto, everything – and then taxes them the appropriate capital gains tax rate.

There’s a common misperception that the US Exit Tax only targets the wealthy, but this isn’t true. Technically speaking, having a high net worth is just one way in which you could be deemed a covered expatriate. Which, naturally, begs the next question…

What Is A “Covered Expatriate?”

There is a lengthy legal definition of this, which we’ll spare you and just explain it in practical terms; a “covered expatriate” is someone who, having either terminated their US residency or renounced their US citizenship, triggers the exit tax in one of three ways. 

You are considered a Covered Expatriate if:

• You fail to certify compliance with US tax for the past five years (Form 8854).

• Your average tax bill from the past five years exceeds a specified amount (currently $206,000).

• You have a net worth of $2 million or more on the day you terminate your residency or renounce.

Or, to put it another way, if you meet any of those abovementioned criteria, you have to pay the exit tax. 

Covered Expatriate Criteria 1: Non-compliance

Regardless of income, an individual may be deemed a covered expatriate due to non-compliance. 

In many cases, this is simply due to a misunderstanding of the process itself or an error on the Initial and Annual Expatriation Statement, known as Form 8854. 

For green card holders in particular, for whom the tax system is unfamiliar and perhaps English is not their first language, the risk of non-compliance is high. Though it can just as easily be an issue for anyone who fails to tick all the right boxes. 

That’s why it’s critical you understand the process well in advance and ensure you get everything in proper order to ensure you are fully tax compliant in the five years before deciding to leave the US. 

Covered Expatriate Criteria 2: Average Tax Bill

This next one also causes some confusion, as the value changes every year. 

Essentially, you need to ensure that your average net income tax value for the five years before choosing to repatriate/renounce does not exceed a specific amount. 

Since that amount is then adjusted for inflation every year, the value rises annually.

In 2024, the average threshold was $201,000, in 2025 it’s $206,000, and so on. 

Covered Expatriate Criteria 3: Net Worth

And last but far from least, we have the net worth criteria. 

This one is obviously quite self-explanatory; if your net worth is equal to, or in excess of, $2 million USD, you automatically become subject to the exit tax.

In this instance, however, there is an exclusion amount which, as with previous, varies by calendar year due to inflation. 

US Exit Tax: Exclusion Amount 2025

The US Exit Tax offers a set exclusion amount, which is adjusted for inflation each year. 

Currently, that exclusion amount is $890,000, which is then subtracted from your net amount to determine your taxable income. 

The remainder, once the exclusion amount has been deducted, is then taxed as a capital gain. 

US Exit Tax: How It Works

To better explain the US Exit Tax, let’s take the fictitious example of a wealthy investor called Sarah. 

Sarah is a successful digital nomad looking to leave the US for good. Her portfolio looks as follows:

Crypto portfolio	A villa in Portugal
Was worth: $100,000	Was worth: $250,000
Now worth: $900,000	Now worth: $850,000

Unrealised capital gains: Crypto: $800,000 Real estate: $600,000

Total gain: $1.4 million

Ok, so as you can see, Sarah’s portfolio has grown considerably, netting her unrealised capital gains of $1.4 million USD. 

When we apply the current Exclusion Amount of $880,000, that amount drops considerably to $520,000

$1.4 million (total gain) – $880,000 (2025 figure) = $520,000

That remaining $520,000 is now liable for capital gains at the upper rate, combined with the additional rate of 3.8% NIIT (Net Investment Income Tax) to bring us Sarah’s final tax amount. 

$520,000 (taxable gain) × 23.8% (capital gains + NIIT) = $123,760

Obviously, Sarah’s situation is a highly simplified version for the purposes of this article. Real case scenarios are obviously far more complex and interconnected. 

Can You Avoid the Exit Tax?

Swap out the word “avoid” for “negate”, and the answer becomes yes. 

When it comes to taxes, the proper verbs matter. You’re not avoiding the exit tax; you’re negating it by eliminating the inciting triggers which result in being subject to the exit tax in the first place.

To do so, you need to start planning ahead and making the exit tax a key component of your exit strategy. That way, you’re automatically deemed a non-covered expatriate, rather than a covered expatriate. 

Keep in mind that most people who renounce don’t end up paying the US Exit Tax. Why? Because their taxes are all in order, and they’re under the net worth threshold. 

So, the first step is to ensure all your taxes are in order, especially since many endup as covered expatriates due to silly errors – but that’s not going to happen to you. 

You’re going to ensure everything is how it should be five years accounted for with no loose threads for the IRS man to pull on. 

So far, so good. Now here’s where things get trickier. 

Reducing your wealth below the threshold is possible, since people do it all the time. Though it may not be possible in your case.

In either case, you need to plan carefully and think strategically, as the solution will invariably take time to carefully implement. 

US Exit Tax: Gifting Strategy

For one reason or another, reducing your income may not be feasible beyond a certain point. 

This is where you may wish to employ a gifting strategy. 

What you are doing, in this instance, is gifting assets to your spouse or another family member, thus helping to bring your own personal net worth under the $2 million USD threshold. 

Simple in theory, trickier in practice, especially when you consider how asset value can fluctuate. Once again, timing is critical and the more preparation you do, the more successful you’re likely to be. 

If you plan the gifting out well ahead of the five-year period, then all will be considered above board. But if you suddenly bequeath gifts to your partner days before your expatriation, of course, the IRS will see straight through that. 

In other words, start talking to your accounts and lawyers now. 

The US Exit Tax: Key Takeaways

• The US Exit Tax, also known as the Expatriation Tax, is a special tax on expatriates.

• With the US Exit Tax, all unrealised capital gains are taxed as though all assets were sold on the day of expatriation. 

• Expatriates are either long-term residents who give up their green card or citizens who renounce. In either case, only so-called “Covered Expatriates” are taxed.

• Covered Expatriates are expatriates who trigger the US Exit Tax either through non-compliance, exceeding the annual tax threshold, or who are deemed to have a high net worth ($2 million or more). 

• While the latter two criteria tend to target only wealthy individuals, others may find themselves caught out due to non-compliance due to technical issues.

• Relief is available via the Exclusion Amount, which is currently at $890,00 (but changes every year, adjusted for inflation).

• To calculate your taxable value, first subtract the exclusion amount from your total gains. 

• Your taxable value is then subject to the relevant level of capital gains tax plus NIIT, where relevant (so for HNWIs this would be 23.8%)

• While you cannot avoid the US Exit Tax, you can mitigate its effects or negate it completely through careful financial planning and through strategic gifting strategies. 

US Exit Tax: Conclusion

The US Exit Tax is the final hurdle you need to clear before you’re free of the IRS for good. 

So extra care must be taken to avoid it, lest you find yourself quoting the famous words of Michael Corleone, “just when I thought I was out, they pull me back in!”

Avoiding that situation takes three things: preparation, planning and compliance. 

• Preparation: Getting all your affairs in order well in advance, not just your taxes, but the full details of your exit strategy.

• Planning: This, in turn, leads to financial planning elements with regard to your financial affairs in general and your estate in particular, and may include gifting strategies. 

• Compliance: Finally, there’s the actual taxes themselves, which need to be filed properly for the preceding five years. 

The final step is every bit as important, because imagine getting yourself under the net worth threshold only to wind up being labelled a covered expatriate due to a filing irregularity. It might sound improbable, but I’m sure you’d rather not find out that it’s possible. 

So, make sure everything is planned out carefully first to guarantee as amicable a breakup as you can from Uncle Sam, before you’re free to enjoy greener, post-IRS pastures. 

Need some help planning the finer details? Then our Blueprint path to freedom service is for you, a complete strategy encompassing legal tax reduction, second citizenships, offshore banking and more, all customised to your specific needs.

For more information, talk to Millionaire Migrant today.

US Exit Tax FAQs

What is the US Exit Tax?

The US Exit Tax is a special tax which often accompanies the expatriation process. 

If you become subject to the US Exit tax, you will be taxed on all your unrealised capital gains, as though all of your assets were sold on the day of expatriation. 

Does the US Exit Tax affect all expatriates?

The US Exit Tax only covers what are known as “Covered Expatriates”, these are either long-term residents who give up their green card, or citizens who renounce and have been deemed eligible to pay the exit tax based on one of the following criteria: 

1. They have a net worth of $2 million USD.
2. Their average tax bill for the past five years exceeds the specified amount ($206,000 as of 2025).
3. You fail to certify compliance with US tax for the past five years (non-compliance).

Is the US Exit Tax only for rich people?

Not necessarily. Although two of the three criteria (high net worth and/or average tax bill) apply more to affluent individuals, the compliance criteria can apply to all and can theoretically be triggered by an error in your Form 8854. 

Is the US the only country with an exit tax?

No. Other countries, such as Canada and Australia, employ similar mechanisms however, the United States is unique in that it continues to insist on taxing its citizens even after they have moved overseas. 

What is the NIIT?

The NIIT (Net Investment Income Tax) is an additional tax of 3.8% aimed at high-income Americans. It is typically added on top of passive income earnings such as capital gains.