What is Exit Tax?

The exit tax is the US government's way of collecting tax on unrealized gains before you leave the tax system. It's the single biggest financial obstacle to expatriation.

How It Works

If you're a covered expatriate, the IRS treats you as if you sold all your worldwide assets at fair market value on the day before your expatriation date. You then owe capital gains tax on the net unrealized gain, minus an exclusion amount.

The Exclusion Amount

For 2024, the first $866,000 of gain is excluded (adjusted annually for inflation). Gains above this threshold are taxed at regular capital gains rates (0%, 15%, or 20% depending on income).

Who Is a "Covered Expatriate"?

You're covered (and owe exit tax) if any of these apply:

1. Net worth of $2 million or more on the date of expatriation
2. Average annual net income tax for the prior 5 years exceeds approximately $190,000 (2024, adjusted annually)
3. Failure to certify 5-year tax compliance on Form 8854

What's Subject to Exit Tax

• Stocks, bonds, and investment portfolios
• Real estate (worldwide)
• Business interests
• Cryptocurrency holdings
• Art, collectibles, and other appreciated property
• Deferred compensation (401k, IRA, pension) — taxed differently via 30% withholding

What's NOT Subject

• US real property (taxed under FIRPTA if later sold)
• Items with no gain
• Assets below the exclusion threshold

Planning Strategies (Done Years in Advance)

• Gift assets before expatriation — but beware of the gift tax and the "covered gift" rules
• Realize gains gradually over multiple years before expatriation to stay below covered thresholds
• Reduce net worth below $2M threshold through legitimate spending, gifting, or charitable donations
• Roth conversions — converting traditional IRA to Roth and paying tax before expatriation means no deferred compensation withholding
• Installment election — you can elect to defer exit tax payments (with interest) by posting a bond with the IRS

Post-Expatriation Traps

Even after expatriating, covered expatriates face:

• Covered gifts/bequests: Anyone who receives a gift or inheritance from a covered expatriate pays a special transfer tax (currently the highest gift/estate tax rate, ~40%)
• US-source income: Still subject to US tax (30% withholding)
• US real estate: Still subject to FIRPTA on sale

The Bottom Line

The exit tax is why planning 3-5 years before expatriation is critical. Spontaneous renunciation without planning can result in a six or seven-figure tax bill.