Expatriating from the U.S.? Solve Your Tax Issues First.
When you renounce U.S. citizenship or long-term residency, you may face an unexpected "Exit Tax." This is a powerful regime that taxes you on the deemed sale of your worldwide assets. The first step is to determine if you are subject to this tax.
Am I Subject to the Exit Tax?
The Exit Tax only applies to "Covered Expatriates." Green card holders must first check if they are "Long-Term Residents." Then, if you meet any of the three tests, you become a covered expatriate. Use the tool below to diagnose your status.
Step 1: Long-Term Resident (LTR) Test (For Green Card Holders)
A "Long-Term Resident" is someone who has been a lawful permanent resident in at least 8 of the last 15 years, ending with the year of expatriation. Exceeding the 8-year rule by even one day makes you an LTR.
Step 2: Covered Expatriate Test
Is your worldwide net worth (total assets minus total liabilities) $2 million or more on the date of expatriation?
Is your average annual net income tax liability for the 5 years preceding expatriation greater than $206,000 (for 2025)?
Can you certify that you have complied with all U.S. federal tax obligations (income tax, FBAR, etc.) for the 5 years preceding expatriation?
How Is the Tax Calculated?
If you are a "Covered Expatriate," you are treated as having sold all your worldwide assets at fair market value on the day before you expatriate, and you must pay tax on the unrealized gains. However, not all assets are treated the same.
General Assets: Mark-to-Market Regime
Most assets, like real estate and stocks, fall under this category. After calculating the unrealized gains, a significant exclusion amount is applied. The chart below illustrates how the taxable gain is determined.
The capital gain exclusion amount for 2025 is $890,000.
Special Assets: More Adverse Rules Apply
Certain retirement accounts and trust assets are excluded from the mark-to-market regime and are subject to separate, often more unfavorable, rules.
U.S. Retirement Accounts (401k, IRA, etc.)
The entire account balance is deemed to be distributed the day before expatriation and is taxed at ordinary income rates. (However, for "eligible" plans like a 401k, you may elect 30% withholding instead).
Foreign Pensions (e.g., Korean National Pension)
In the most unfavorable scenario, the entire present value of your accrued benefits is deemed received as a lump sum and taxed immediately.
Interests in Trusts (Non-Grantor Trust)
There is no immediate tax, but future distributions from the trust are subject to a high 30% withholding tax.
How to Avoid or Reduce the Exit Tax
The exit tax is not an unavoidable fate. With systematic planning, you can legally and significantly reduce the tax burden. The key is to manage your finances to avoid becoming a "Covered Expatriate" and to consider the tax implications for future generations.
Strategy 1: Pre-Expatriation Gifting to Manage Net Worth
This strategy involves gifting assets before expatriation to lower your net worth below the $2 million threshold of the Net Worth Test. The rules differ depending on the recipient.
Gifts to a U.S. Citizen Spouse
You can transfer an unlimited amount of assets to a U.S. citizen spouse without gift tax, making it the most effective way to reduce your net worth.
Gifts to Children and Others
Gifts exceeding the annual exclusion ($18,000) use up your lifetime gift tax exemption. Importantly, these gifts should be made more than 3 years before expatriation to be safe (3-Year Clawback Rule).
Strategy 2: Inheritance Planning Before and After Expatriation
If you plan to transfer assets to children living in the U.S., the timing of your expatriation makes a critical difference. After you expatriate, a harsh "Succession Tax" awaits.
Gifting Before Expatriation (BEST)
The gift tax, if any, is your responsibility (using your lifetime exemption). Your children receive the assets tax-free.
Gifting After Expatriation (WORST)
The tax is imposed on the U.S. resident child who receives the gift, not you. The lifetime exemption does not apply.
Action Plan Roadmap
Systematic time management is key to successful expatriation tax planning. Use the timeline below to see what you need to prepare and execute at each stage.
5 to 3 Years Before D-Day: Pre-Audit & Planning
- Thoroughly review and amend past 5 years of tax filings.
- Calculate your Long-Term Resident (LTR) status date.
- Execute gifting plan to reduce net worth (consider 3-year rule).
1 Year to D-Day: Execution Phase
- Decide on and execute sale of foreign assets like real estate.
- Consider taking a lump-sum distribution from foreign pensions.
- Execute expatriation (File Form I-407 or renounce citizenship).
- Appraise all assets as of the day before expatriation.
Year After D-Day: Final Tax Filing
- File a dual-status tax return for the year of expatriation.
- Attach Form 8854 (Expatriation Statement).
- Pay Exit Tax or make arrangements to defer payment.