The exit tax

We have clients all over South America, and in sixteen years of preparing returns for people living abroad, not one has renounced. That is typical. Fewer than ten thousand people a year do it, and most of them are not our clients. But the rules reach further than renunciation: they also apply to a green-card holder who has had the card a long time and gives it up, and that is a situation we do see. Here is what the exit tax is, who it actually touches, and why we send the ones it touches to an attorney.

Why there is an exit tax

Every other country in the world taxes you because you live there. Leave, and their claim ends. The United States taxes you because you are American, so the only way to end its claim is to give up the passport. For most of the twentieth century that was a tax planning strategy for a small number of very wealthy people: build the fortune under U.S. law, renounce, and sell it somewhere with no capital gains tax. Congress tried several times to close the door and in 2008 settled on the mark-to-market approach that is the law today. The theory is simple. If the gain accrued while you were American, the United States gets to tax it before you go. If you are not wealthy, the exemption means you owe nothing, but you still have to file the form and prove it.

The expatriation event

Everything in this subject turns on one date, so the law is precise about what counts as leaving. For a citizen, the expatriation date is the earliest of: the day you renounce before a U.S. consular officer, the day you give the State Department a signed statement that you voluntarily gave up citizenship, the day the State Department issues a Certificate of Loss of Nationality, or the day a court cancels a naturalization. In practice it is almost always the consular appointment: an oath, a questionnaire, a $2,350 fee, and a wait that in some countries runs a year.

For a green-card holder, the rules are different and easier to trip over. You are a “long-term resident” if you held the card in at least 8 of the 15 tax years ending with the year you give it up, counting any part of a year as a year. If you are, then the expatriation date is the day your status is revoked or you formally abandon it (Form I-407 to an immigration officer), or the day you start claiming to be a resident of another country under a tax treaty and do not waive the treaty benefit. Letting the card expire in a drawer in Buenos Aires does none of those things: you remain a U.S. tax resident, filing on your worldwide income, until you abandon the card on paper. We see this one. Someone moved home years ago, stopped filing because they thought the card had lapsed, and is still a U.S. taxpayer with years of unfiled returns. When they finally file the I-407, if they held the card eight years, they are expatriating, and the clock on this page starts.

Covered or not covered

Expatriating does not by itself cost anything. The tax applies only to a covered expatriate, and you are covered if any one of three things is true on the expatriation date:

• Net worth of $2 million or more. Everything, worldwide, at fair market value, including the house, the pensions and the business, net of debts. This number has not been adjusted since 2008.
• Average annual U.S. income tax over $211,000 for the five years before the year of expatriation. The 2026 figure; it is indexed. This is tax paid, not income, so it catches people well into seven figures of income.
• You cannot certify, under penalties of perjury, that you complied with all U.S. tax obligations for the five years before. Returns, tax paid, FBARs, foreign information forms, all of it. This is the test that catches ordinary people. A retired teacher in Ecuador with a $400,000 net worth who never filed an FBAR for her local bank account is a covered expatriate on the certification alone, and the exit tax applies to her as though she were a millionaire.

Two exceptions: a person who was a dual citizen from birth, still is, and is taxed as a resident of the other country, with no more than 10 of the last 15 years as a U.S. resident; and a person under 18½ who has been a U.S. resident no more than 10 years. Either one escapes covered status, but only if they can also make the compliance certification.

That third test is why the first conversation about expatriating is never about the exit tax. It is about the last five years: get every return filed, every FBAR and Form 8938 in, every foreign pension and mutual fund reported, using the streamlined procedures if it was not done. Only then is the certification honest, and only then do the other two tests decide anything.

What the tax is

A covered expatriate is treated as having sold every asset on the day before the expatriation date, for fair market value. The gains and losses are figured as if real, the first $910,000 of net gain (2026) is exempt, allocated across the gain assets in proportion, and the rest goes on the final U.S. return as capital gain or ordinary income depending on the asset, at regular rates. Nothing was actually sold, so nothing came in to pay it with. The tax can be deferred asset by asset until the asset is really sold, but only with a bond or other security posted with the IRS and interest running. A few things are carved out of the pretend sale and handled their own way:

• IRAs, 529 plans, HSAs and similar accounts are treated as fully distributed the day before you leave, with no early-withdrawal penalty but full income tax.
• Pensions and deferred compensation from a U.S. payer are not taxed on the way out; instead every later payment carries 30% withholding, and you give up any treaty rate on it. A foreign pension, or one from a payer who will not cooperate, is taxed at present value on the way out.
• Interests in non-grantor trusts are taxed as distributions are made, with 30% withholding.

A green-card holder who came to the U.S. with assets gets one break: for the exit tax only, the basis of everything owned on the day residency began is stepped up to its value that day, so the gain from before arriving is not taxed on the way out.

Form 8854 and the final return

The year you expatriate is a split year. You file a regular Form 1040 for January 1 through the day before the expatriation date, with Form 8854 attached, and a Form 1040-NR for the rest of the year if there was any U.S.-source income after. Form 8854 is where you give the five years of tax liability, a full balance sheet at fair market value, the compliance certification, the list of deferred accounts and pensions, and, if covered, the pretend sale itself, asset by asset. A copy goes separately to the IRS in Philadelphia. The form is required whether or not you are covered and whether or not any tax is due. Without it, you are still treated as a U.S. citizen or resident for tax purposes, and the penalty is $10,000. A covered expatriate with deferred tax, pension payments or trust interests files it again every year.

The part that lasts

The exit tax is one time. Section 2801 is not. When a covered expatriate gives or leaves anything to a U.S. citizen or resident, the recipient owes tax on it at the top gift and estate rate, 40%, on the amount over the annual exclusion, $19,000. The donor’s lifetime exemption is not available; it belongs to a system the expatriate left. This has been in the Code since 2008, but the IRS did not enforce it until final regulations came out in January 2025 and the return, Form 708, in January 2026. Gifts received in 2025 are reported on a Form 708 due June 15, 2027. For a family with adult children still in the United States, this is usually the number that decides whether expatriating makes sense at all. The way around it is to make the gifts before expatriating, while the lifetime exemption is still yours.

Things worth knowing before anyone goes to the consulate

• The tax does not stop with the exit. U.S.-source income after expatriation — rent from the Denver house, U.S. dividends, a U.S. pension — is still taxed, on Form 1040-NR, usually by withholding at 30% or a treaty rate.
• Social Security survives. Renouncing does not forfeit earned benefits, though payments to a nonresident alien in some countries are reduced or withheld on.
• The U.S. estate tax still reaches U.S. property. A nonresident alien’s estate gets a $60,000 exemption on U.S.-situs assets, not $15 million. The Denver rental in the example is still in the U.S. estate.
• Accidental Americans have a special door. Someone born in the U.S. who left as a child, never filed, has a net worth under $2 million and would have owed little tax can renounce and catch up under the IRS’s Relief Procedures for Certain Former Citizens with no tax and no penalty. We have seen the children of clients fit this.
• It is permanent. There is no undo. A former citizen who wants to come back applies for a visa like anyone else, and a former citizen the government decides renounced to avoid tax can be denied entry.