What is the U.S. “exit tax”?
The U.S. has a special federal tax you may owe if you renounce U.S. citizenship or end your status as a “long-term resident”. The rules for “green card” holders are particularly complex and nuanced, especially considering the federal district court case of Aroeste vs. the United States. This expatriation tax generally applies if you are considered a covered expatriate under the law, which is a technical category for specific taxpayers. Meeting any one of three tests typically puts you in that category. The next section further explains the three tests.
The law uses a deemed sale (a worldwide fictional sale for tax law purposes) rule to calculate the tax. This rule treats your global property as if you sold it for its market value the day before you cease to be a ‘United States person”. As a covered expatriate, you are typically required to pay income tax on the gain from the deemed sale. This is what the law calls the mark-to-market tax. For 2026, $910,000 of the gain is excluded from tax.
Learn more about what covered expatriate status means for you in What Happens If You Become a Covered Expatriate?
Who has to pay it?
You are typically required to pay the U.S. exit tax as a covered expatriate when you renounce U.S. citizenship or end your status as a long-term resident if you hold a green card. Here is where it gets complicated under the law for green card holders. Meeting any one of three specific financial and compliance tests classifies you as a covered expatriate.
The three tests are:
- Net worth test — your total net assets are worth $2 million or more on the day before you become a covered expatriate.
- Tax liability test — your average annual net income tax liability for the five tax years ending before your exit date was more than $211,000. This amount is adjusted annually for inflation, and its calculation can be complicated.
- Certification test — you fail to certify under penalty of perjury that you have complied with all federal tax laws for the preceding five years. This is typically the most important requirement, and often individuals fail this test when complying with the first two.
Green card holders face many legal questions tied to their immigration status, which can affect their tax residency status. Understand more by referencing the following articles:
- Can you Lose Your Green Card for Tax Purposes Just by Moving Abroad?
- Most important Questions for “Green Card” Holders (“lawful permanent residents”): Part II of VI
- Immigration Forms, I-407; I-485, Application to Register Permanent Residence or Adjust Status & Tax Forms, 1040, 1040NR, 8833, 5471, 8854, 8621, 3520, 8864, 8858 and FinCEN forms 114, etc. etc. (Part I of III)
How much is the exit tax?
The amount you may owe depends on the total taxable gain of your worldwide assets deemed sold, the day before you become a covered expatriate. This expatriation tax uses a deemed sale rule to figure out how much the exit tax is for your specific situation. You treat your property as if you sold it for its current market value, even though you keep the assets.
If you are a covered expatriate (see who has to pay, above), then you are required to pay the tax on these calculated gains. For 2026, you can reduce your total taxable gains by a $910,000 exclusion amount.
Suppose you own stocks worth $2,000,000 that originally cost you $500,000:
- Your total unrealized gain on the deemed sale is $1,500,000.
- Subtract the $910,000 exclusion for 2026.
- You would owe federal income tax on the remaining $590,000.
For how the exclusion amount has grown since 2008, see Inflation Adjusted Exclusion Amounts Since Inception of 2008 “Mark to Market” Expatriation Tax Law: Example.
The worst part of the tax regime for most people is not the exit tax; it’s the “forever taint” 40% tax on the asset values.
By merely being a covered expatriate, your family and friends who are U.S. citizens or residents will have to pay a 40% tax on property they receive from the covered expatriate in the form of a gift or inheritance. Using the example above of the exit tax on 590,000 dollars, if the covered expatriate now gifts $1,000,000 after the stock sale to his U.S. dual national daughter, she will be required to pay $400,000 of the forever taint tax.
How can you avoid the exit tax?
Certain dual citizens and minors may be exempt when they renounce U.S. citizenship. The law gets complicated here as well.
Learn more about who cannot use the dual-citizen exception in Why a Naturalized Citizen cannot avoid “Covered Expatriate” status under IRC Section 877A(g)(1)(B).
Patrick W. Martin’s full analysis of the certification requirement: What Is the 5-Year Tax Compliance Requirement for Renouncing US Citizenship?
Legal advice is imperative for complex cases.
Do green card holders pay the exit tax?
Yes, you are subject to the expatriation tax as a green card holder if you are a covered expatriate. You generally fall into this category by not formally abandoning your status (e.g., filing USCIS Form I-407) within the required time period permitted in the tax law. The law becomes extremely complicated for green card holders, especially for those residing within countries with an income tax treaty with the United States. See Aroeste vs. the United States.
Learn why long-term residents cannot escape covered expatriate status in Why a “long-term” LPR can NEVER avoid “Covered Expatriate” status under IRC Section 877A(g)(1)(B) if Asset or Tax Liability Test is Satisfied!
What happens to your pension plans (e.g. IRA and 401(k))?
There are special rules that apply to your pension plans. You should review the details of your specific retirement plan with a legal professional.
One basic example is if you have a $400,000 IRA and are a covered expatriate. You may be required to report the full $400,000 as income on your tax return for the year you become a covered expatriate. You generally cannot use the $910,000 exclusion to lower the tax on this retirement account; however, special tax treaty rules may produce a particular beneficial outcome.
What happens if you are a covered expatriate?
If you are a covered expatriate, this is a complex area of the law, and anyone taking these important life-changing decisions should seek competent U.S. international tax legal advice. See for instance Patrick W. Martin’s breakdown of some of these consequences: What are the consequences of becoming a “covered expatriate” for failing to comply with Section 877(a)(2)(C)?
Here is a diagram to help determine whether you are a covered expatriate:
The two-step covered expatriate test, with 2026 dollar amounts. General information, not legal advice.
The “forever taint” 40% tax on gifts or bequests to your U.S. beneficiaries (Section 2801)
As already explained above, your covered expatriate status also triggers a lasting 40% tax forever into the future on any gifts or inheritances you leave to U.S. citizens or U.S. residents under Section 2801. This tax generally applies to the person receiving the gift, not the person giving it. For example, if you give a $1,019,000 gift to a U.S. person, you first subtract the $19,000 annual exclusion. Your heir will then owe a 40% tax on the remaining $1,000,000, which equals a $400,000 tax bill.
The U.S. beneficiary who receives the gift or inheritance from a covered expatriate is required to file new IRS Form 708 and pay the tax.
Learn more about how this tax reaches the next generation in IT AIN’T FAIR: taxing me, my exit, and my children’s inheritance
Can a tax treaty save green card holders?
A green card holder may be able to end their U.S. residency by application of a tax treaty with another country. The law gets particularly complex depending on the facts of each circumstance, and Patrick W. Martin, the author, represented the green card holder in the landmark case Aroeste vs. the United States. This may trigger the same tax consequences as giving up your citizenship if you have held your green card for certain periods
What is Form 8854?
Form 8854 is the official form created by the IRS, which was found to be legally invalid in the case of Aroeste vs. the United States. See below the excerpt from the case:
C. Whether Aroeste Was Required to File Form 8854. The Government next argues that even if the IRS had accepted Aroeste’s amended returns, neither amended return would have properly notified the IRS of a commencement of treaty benefits because both failed to attach Form 8854, as required by IRS Notice 2009- 85. (Doc. No. 76-1 at 4–5.) The Government concedes Aroeste attached Form 8833 to both amended forms. (Id.) Aroeste responds that Notice 2009-85 is not binding authority as it fails to comply with the Administrative Procedures Act (“APA”). (Doc. No. 78-1 at 8 (citing Green Valley Investors, LLC v. Comm’r of Internal Revenue, 159 T.C. No. 5, at *4 (Nov. 9, 2022)) (under the APA, agencies must follow a three-step procedure for “notice-and-comment” rulemaking, but this requirement does not apply to “interpretive rules, general statements of policy, or rules of agency organization, procedure, or practice.”).) The Court agrees. In Mann Construction, Inc. v. United States, 27 F.4th 1138 (6th Cir. 2022), the court found that Notice 2007-83 failed to comply with the APA’s notice-and-comment procedure. Similarly here, because Notice 2009-85 has not been subject to a notice-and-comment procedure, it does not comply with the APA and thus is not binding. As such, Aroeste was not required to file Form 8854 with his amended returns. [emphasis added]
For how often this form is actually filed — and missed — see Form 8854 Filing: TIGTA Report Reveals Compliance Gap.
Frequently asked questions
Is there an exit tax when leaving the US?
Does the US tax you if you leave the country?
How much is the green card exit tax?
Do dual citizens pay exit tax?
Is there an exit tax on cash?
Which US states have an exit tax?
What is a non-covered expatriate?
What happens to my 401(k) if I move abroad?
Does renouncing citizenship let you avoid US taxes
What happens if I haven’t paid US taxes as an expat?
Is there a US exit tax calculator?
