The United States taxes individuals who give up citizenship or abandon a green‑card on the day they expatriate. The “exit tax” (formally the expatriation tax) treats all worldwide assets as if they were sold at fair market value on the expatriation date, triggering capital‑gains tax on any unrealised appreciation.
Who is a “covered expatriate”?
A person becomes a covered expatriate—and therefore must pay the exit tax—if any of the following conditions is met:
- Net worth exceeds $2 million (USD).
- Average annual U.S. tax liability over the prior five years exceeds $190,000 (USD).
- The individual has failed to be tax‑compliant for the past five years (e.g., missing filings or underpayment).
If none of these thresholds apply, the individual is a non‑covered expatriate and is not subject to the exit tax.
How the tax is calculated
For covered expatriates the IRS applies a deemed‑sale on all assets. The first $880,000 (adjusted annually; $880 k is the 2025 exemption) of total unrealised gains is excluded. Any amount above that is taxed at the applicable long‑term capital‑gains rate (currently up to 23.8 % including the Net Investment Income Tax).
Example (2025 figures)
| Asset | Purchase price | Fair market value | Unrealised gain |
|---|---|---|---|
| Crypto portfolio | $100,000 | $900,000 | $800,000 |
| Villa in Portugal | $250,000 | $850,000 | $600,000 |
| Total | — | — | $1,400,000 |
- Exempted gain: $880,000
- Taxable gain: $1,400,000 − $880,000 = $520,000
- Tax at 23.8 %: $123,760
Thus, a net‑worth of $2.5 million can generate a six‑figure exit‑tax bill.
Common mitigation strategies
| Strategy | How it works | Effect |
|---|---|---|
| Gifting | Transfer assets to a spouse or children before expatriation, ensuring the gifts are not taxable events. | Reduces net‑worth below the $2 M threshold, avoiding covered‑expatriate status. |
| Lowering annual income | Reduce taxable U.S. income in the five years preceding expatriation (e.g., by deferring compensation). | Keeps average annual tax liability under $190 k. |
| Irrevocable foreign trust | Move assets into a non‑grantor irrevocable trust located outside the U.S. and wait at least five years. | Assets are no longer considered owned by the expatriate, so they are excluded from the deemed‑sale calculation. |
| Tax compliance | File all required returns and pay any outstanding taxes for the prior five years. | Removes the “non‑compliant” trigger for covered status. |
All of these approaches require advance planning—often three to five years before the intended renunciation—to be effective.
Alternatives to renunciation
If giving up U.S. citizenship is not yet desirable, expatriates can still reduce their U.S. tax exposure:
- Foreign Earned Income Exclusion (FEIE): Qualify by having bona‑fide residence or physical presence abroad and earn active income; up to $120,000 (2024) of foreign wages can be excluded.
- Puerto Rico tax incentives: Establish residency in Puerto Rico and benefit from local tax regimes that can substantially lower U.S. tax obligations on certain income types.
- Dual‑citizenship planning: Acquire another nationality before renouncing U.S. citizenship to avoid statelessness, as U.S. law requires a person to hold another citizenship at the time of renunciation.
Practical takeaways
- Determine early whether you meet any covered‑expatriate criteria; the net‑worth test is the most common trigger.
- Begin asset‑restructuring (gifts, trusts) well in advance of the intended expatriation date.
- Maintain full compliance with U.S. tax filings for at least five years prior to renunciation.
- Consider the FEIE or Puerto Rico residency as interim measures to lower ongoing U.S. tax liability while you plan a longer‑term exit.
