Expatriation Tax

What Is the US Expatriation Tax?

The US expatriate tax, often called the exit tax, applies to U.S. citizens who relinquish citizenship and long-term residents who terminate permanent-resident status.

A long-term resident held a green card during at least eight of the 15 tax years ending with expatriation. Moving abroad does not trigger the tax. The rules focus on formally ending citizenship or long-term residency.

What Makes Someone a Covered Expatriate

An individual generally receives covered status by meeting any one test:

1. Average annual net U.S. income tax liability for the five preceding years exceeds the indexed amount. The 2026 threshold is $211,000.
2. Net worth is at least $2 million on the expatriation date.
3. The individual cannot certify five complete years of federal tax compliance on Form 8854.

Compliance may include filing required tax returns, FBARs, foreign-entity information returns, and, where applicable, partnership or S corporation reporting such as Schedules K-2 and K-3. Limited exceptions may apply to certain dual citizens and minors.

How the Exit Tax Is Calculated

For a covered expatriate, the mark-to-market rule generally treats most assets as if they were sold for fair market value on the day before expatriation. In plain terms, the IRS compares what you paid for an asset (tax basis) with what it is worth today (fair market value) to calculate the unrealized gain. For example, after calculating this difference for your home and stocks, you may have a total unrealized gain of $1.5 million.

The $910,000 statutory exclusion for 2026 then reduces the total net deemed gain. In this example, subtracting the exclusion from the $1.5 million gain leaves $590,000 subject to tax under the applicable rules. Certain deferred compensation, tax-deferred accounts, and trust interests follow separate rules.

What Form 8854 Requires and When It Must Be Filed

The form reports expatriation dates, status history, five-year tax liability, net worth, assets, liabilities, deferred compensation, tax-deferred accounts, and trust interests. It contains the five-year compliance certification.

The initial filing is attached to the final U.S. income tax return for the expatriation year and filed by that return’s due date, including extensions. Some expatriates have annual filing duties.

An incomplete, inaccurate, or late form can trigger a $10,000 penalty unless reasonable cause applies. Failure to certify compliance can create covered status.

Planning Strategies That Can Reduce Expatriation Tax Before You Leave

Planning should begin before citizenship or long-term residency ends. Steps include correcting missing filings, documenting basis, obtaining valuations, timing gains and income, and reviewing retirement or compensation arrangements.

Individuals near the $2 million threshold may evaluate gifts, debt, ownership structure, and expatriation timing. Green card holders should review the eight-of-15-year test. Controlled foreign corporation owners should address Global, Intangible, Low-Taxed Inclusion (GILTI) reporting before certifying compliance.

State residency, trust interests, future gifts to U.S. persons, and cash available for tax deserve review.

FAQ

Does the expatriation tax apply to green card holders or only US citizens?

It applies to both, but not every green card holder. The rules generally cover permanent residents who held a green card during at least eight of the 15 tax years ending with the year their long-term U.S. residency terminates.

Is there a way to avoid becoming a covered expatriate before giving up citizenship?

Potentially. Advance planning may address tax compliance, timing, net worth, asset ownership, and unusually high tax-liability years. Any gifts or restructuring should be lawful, carefully documented, and fully evaluated for gift, estate, income, and state tax consequences before expatriation occurs.

Can deferred compensation or pension balances trigger additional tax at expatriation?

Yes. Eligible deferred compensation may remain taxable when later paid, generally with special withholding requirements. Ineligible arrangements may be treated as immediately received. IRAs and certain tax-deferred accounts can be deemed distributed, making account classification and timely paperwork particularly important.

What is the difference between the US expatriation tax and exit taxes other countries impose?

The U.S. regime is unusual because it follows citizenship and long-term permanent residency, not merely tax residence. Other countries generally impose departure taxes when residency ends, often targeting unrealized gains in specified property under defined local rules and exemptions.

How BT Can Help

For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Matt Pellegrom, partner in charge of Bennett Thrasher’s International Tax practice, or call us at 770.396.2200.