Understanding the US Exit Tax
The United States imposes an exit tax, also known as the expatriation tax, on individuals who renounce their US citizenship or terminate their green card status. This tax is governed by Internal Revenue Code (IRC) Section 877A and targets high-net-worth individuals to ensure that their global income and assets are taxed before they leave the US tax system.
Who is Subject to the Exit Tax?
Not all individuals who renounce their US citizenship or green card are subject to the exit tax. Only those classified as “covered expatriates” are required to pay this tax. The IRS determines covered expatriate status based on the following criteria:
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Net Worth: Individuals with a net worth exceeding $2 million on the date of expatriation are considered covered expatriates. Net worth is calculated by adding up the value of all assets, including unrealized capital gains.
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Average Annual Net Income Tax: If an individual’s average annual net income tax liability for the five years preceding expatriation exceeds a certain threshold (adjusted for inflation), they are considered a covered expatriate. For 2023, this threshold is $190,000.
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Tax Compliance: Individuals who fail to certify, under penalties of perjury, that they have complied with all US federal tax obligations for the five years preceding expatriation are also considered covered expatriates.
Calculating the Exit Tax
The exit tax is calculated based on the deemed sale of an individual’s worldwide assets on the day before their expatriation. This means that the expatriate is assumed to have sold all their assets at their fair market value and would be subject to tax on any gains.
However, there is a significant exemption available to covered expatriates. As of 2023, the first $767,000 of gains (adjusted for inflation) is exempt from the exit tax. This means that most US expats who renounce their citizenship will not be subject to the exit tax due to this generous exemption.
Avoiding the Exit Tax
Even if you meet the criteria for a covered expatriate, there are strategies to potentially mitigate or even eliminate your exit tax liability. These strategies include:
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Accelerating income recognition: Recognizing income before expatriation to reduce gains subject to the exit tax.
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Deferring realization of gains: Deferring the sale of assets until after expatriation, provided that you do not meet the covered expatriate criteria.
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Gifting assets: Gifting assets to reduce net worth below the $2 million threshold.
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Ensuring tax compliance: Complying with all US federal tax obligations for the five years preceding expatriation.
The US exit tax is a complex issue that can have significant financial implications for individuals renouncing their US citizenship or green card. By understanding the criteria for covered expatriate status, the calculation of the exit tax, and the strategies for avoiding or mitigating the tax, individuals can make informed decisions about their expatriation plans.
How the US Exit Tax Works when Expatriating
FAQ
How can I avoid US exit tax?
Do any US states have an exit tax?
Do you have to pay taxes to leave the US?
What is the exit tax on a US passport?
What is a US exit tax?
The tax is also known as the expatriation tax. The US exit tax was introduced in 2008, in response to the growing number of Americans renouncing their citizenship . The exit tax is a tax on the unrealized capital gains of U.S. citizens who give up their citizenship or green card . Who is subject to the American exit tax?
Are You subject to the US exit tax?
Whether or not you are subject to the US exit tax depends on whether you are considered a covered expatriate or non-covered expatriate. Covered expatriates are subject to the exit tax. Non-covered expatriates are not. The exit tax only applies to US citizens or long-term legal permanent residents who meet at least one of the following criteria: 1
Do you have to pay exit tax if you leave the US?
Not everyone who leaves the US is required to pay an exit tax. Only US citizens and long-term residents the IRS considers “covered expatriates” are subject to this tax if they renounce their citizenship. The US exit tax is a tax on your worldwide assets.
Do us expats have to pay exit tax?
This means that only gains exceeding the $767,000 threshold are subject to the exit tax. Consequently, a majority of US expats who renounce their citizenship will not be subject to the exit tax due to this generous exemption. Additionally, certain assets are excluded from the deemed sale calculation.