Exit Tax Explained: What Happens When You Move Abroad

Leaving the United States and renouncing U.S. citizenship or long-term resident status requires an exit tax. What is the exit tax? Let’s break down the rules of expatriate taxation and see how everything works in reality. 

What Is an Exit Tax? 

Exit tax definition

Exit tax is the final tax paid by individuals renouncing their U.S. citizenship or long-term residents who cease their status as permanent residents. In other words, exit taxation is a one-time charge on unrealized gains when you step out of the U.S. tax system.

Purpose of exit taxation

Renouncing U.S. citizenship or residency status relates to the exit tax. The primary objective of exit taxation is to prevent wealthy people from evading taxes on gains they accumulated while residing in the U.S. by relocating their assets overseas. 

Who is subject to the exit tax?

Exit taxation isn’t applied to everybody leaving the U.S. It only applies to covered expatriates. 

What does the term ‘covered expatriate(s)’ mean? It generally extends to all U.S. citizens and to long-term holders of Green Cards (people who have held permanent residency for at least 8 of the past 15 years). 

You can be included as a covered expatriate if your net worth exceeds 2 million USD, your average annual U.S. tax due in the past five years exceeded an IRS threshold adjusted for inflation, or if you fail to ensure that you have paid off taxes to the U.S. fully for the five years before becoming an expatriate. If you meet at least one of these conditions, the rules regarding exit taxation apply. 

Expatriate Taxation in the USA

Expatriate tax vs. exit tax

Expatriate tax and exit tax are two different tax responsibilities that come under various conditions. People often mix these up. Expatriate tax is about the regular tax rules that kick in when you live and work outside the USA but still count as a U.S. tax resident. Exit taxation, on the other hand, is a one-time tax you might owe if you leave the U.S. tax system for good.

Key IRS rules for expatriates

The IRS enforces several rules under expatriate taxation.

Worldwide taxation. All income, regardless of where earned, should be reported on U.S. tax returns. This rule applies to wages, business profits, dividends, rental income, and other revenue sources. For many people living overseas, this is where the complexity of expatriate tax begins, since obligations follow them worldwide.

Foreign account reporting. Have a bank account overseas? If the total in your foreign accounts hits 10,000 USD at any point during the year, you have to file extra forms like the FBAR (Report of Foreign Bank and Financial Accounts).

Double taxation relief. To avoid taxing the same income twice, the IRS gives you some relief. You can use the Foreign Earned Income Exclusion (FEIE) and the Foreign Tax Credit (FTC). 

FEIE permits to exclude foreign wages from taxable income, while FTC directly reduces your U.S. tax liability by the amount of taxes you’ve already paid. 

Expatriate tax obligations abroad

Living abroad does not relieve you from the obligations to the IRS. Under expatriate tax rules in the USA, you are required to file a U.S. annual tax return if your income exceeds the IRS thresholds. To protect against double taxation, you can use special tools, such as FEIE or FTC. These benefits are not automatic — to have them, you must file the appropriate tax forms.

And don’t forget that you also need to report bank accounts or investments held outside the U.S. Compliance isn’t just about avoiding penalties — it helps prevent bigger issues later, such as being classified as a “covered expatriate”, which might raise the question - how much is the exit tax in the U.S.?

How the US Exit Tax Works

Exit tax calculation

What is an exit tax liability? To provide you with a better understanding, the IRS “pretends” that you sold all of your assets the day before you give up citizenship or long-term residency. This procedure is known as a deemed sale. Exit taxation applies only to the part of your net gain that goes over the exclusion limit. 

How much is the exit tax in the US?

There’s no single answer to the question “how much is the exit tax in the U.S.?” because it depends on your personal financial situation. What you ultimately owe will depend on the current value of your assets, how much you originally paid for them, and any exclusions or credits you might qualify for. 

Renouncing US citizenship and exit tax implications

Renouncing U.S. citizenship and handling the exit tax should be done properly when you are planning to leave the country. The IRS looks at whether you are qualified as a covered expatriate. Renouncing doesn’t erase your past obligations. You still must show that you’ve been fully compliant with U.S. tax rules.

Exit Tax Planning and Strategies

Minimizing exit tax exposure

With proper exit taxation planning, you can reduce or even avoid exit tax liability. 

How does it work? This might involve receiving some income earlier, or postponing it until after you give up citizenship or residency (as long as you don’t fall under the covered expatriate rules). It might also involve giving away some assets in advance to bring your net worth under 2 million USD, and making sure you’ve filed U.S. taxes correctly for the past five years.

Common mistakes to avoid

One of the biggest misconceptions is that the exit tax applies to everyone giving up U.S. citizenship. In reality, most individuals don’t fall under the definition of covered expatriates, which is the group that the exit taxation affects.

Another common misunderstanding is that the exit tax applies to every asset you own. However, certain items are taxed separately according to their own rules.

Some people believe that the only way to avoid the exit taxation is to hold on to U.S. citizenship entirely. That’s simply not true. Depending on your situation, you might be able to reduce or even avoid the exit taxation entirely.

Professional advice and legal compliance

Both expatriate tax and exit taxation are complex. That is why it’s so important to have a professional who will guide you through any decision-making process. Whether you're thinking about renouncing U.S. citizenship, giving up long-term residency, or just weighing your options for staying in the country, getting the right guidance is key. 

At Icon.Partners, we guide clients through the process by identifying risks, minimizing liabilities, and making sure IRS filings are accurate and complete.

FAQ on Exit Tax

What is an exit tax?

Exit tax is a final tax paid by individuals who renounce their U.S. citizenship or long-term residents who cease their status as U.S. permanent residents.

Who needs to pay the exit tax in the USA?

Exit taxation isn’t applied to everybody leaving the U.S. It only applies to covered expatriates. Those who meet at least one of these three criteria (high net worth, significant average tax liability, or failure to certify full tax compliance) are classified as covered expatriates. 

How is expatriate tax different from exit tax?

Expatriate tax and exit tax are two different types of tax liabilities. Expatriate tax is related to fulfilling tax obligations while living abroad, whereas renouncing U.S. citizenship or residency status is connected with exit tax.

How much is the U.S. exit tax?

The amount of the exit tax depends on your total assets and gains at the time you give up citizenship or long-term residency. 

Does the exit tax apply when renouncing US citizenship?

Yes, the exit tax can apply, but only to those who are classified as covered expatriates under the IRS rules.