US Expatriation & the Exit Tax: What Americans Abroad Need to Know
Renouncing US citizenship or giving up a green card can trigger the exit tax. Our guide covers covered expatriate status, how it works, and planning points.
Renouncing US citizenship — or giving up a long-held green card — is a significant step, and for many it is driven as much by the burden of ongoing US tax filing as by anything else. But leaving the US tax system is not simply a matter of handing in a passport. Certain individuals are treated as "covered expatriates" and face a one-off exit tax that treats their worldwide assets as if sold on the day before expatriation. For Americans in the UK considering this route, understanding the exit tax is essential before making an irreversible decision. This guide explains who is affected, how the exit tax works, and the planning points. It is general information only and does not replace personalised advice.
Key takeaways
- Expatriation covers renouncing US citizenship and, for long-term residents, giving up a green card held in at least 8 of the last 15 years.
- Only "covered expatriates" face the exit tax — determined by net worth, average tax liability, and compliance tests.
- The exit tax deems worldwide assets sold at fair market value the day before expatriation, with an inflation-indexed exclusion applied to the net gain.
- Deferred compensation, pensions, and certain trusts are taxed under separate rules rather than the mark-to-market regime.
- Five years of full US tax compliance is required to avoid covered-expatriate status on the compliance test.
What counts as expatriation
For US tax purposes, expatriation means either renouncing US citizenship at a US embassy or consulate, or — for a long-term resident — abandoning a green card. A long-term resident is someone who held a green card in at least 8 of the 15 tax years ending with the year of abandonment. Simply letting a green card lapse without formally abandoning it can leave someone still within the US tax net, so the exit needs to be handled correctly.
Expatriation triggers a final US tax return covering the part-year up to the expatriation date, and a specific information form reporting assets and the expatriation itself.
Are you a "covered expatriate"?
The exit tax only applies to covered expatriates. You are covered if you meet any one of three tests at the date of expatriation:
| Test | You are covered if… |
|---|---|
| Net worth | Your worldwide net worth is $2 million or more |
| Tax liability | Your average annual US income tax for the 5 prior years exceeds an inflation-indexed threshold (around $200,000) |
| Compliance | You cannot certify 5 years of full US tax compliance |
Meeting even one test makes you a covered expatriate. The compliance test is important: someone well below the wealth and income thresholds can still be caught simply by being behind on filings — which is why getting compliant before expatriating matters.
How the exit tax works
For covered expatriates, the core rule is a deemed sale: worldwide assets are treated as sold at fair market value on the day before expatriation, and the resulting net gain is subject to US tax. An inflation-indexed exclusion (in the region of $890,000, adjusted annually) is applied to that net gain, so smaller estates may owe little or nothing even when technically covered.
Some assets sit outside the mark-to-market rule and follow their own regimes. Eligible deferred compensation may be subject to withholding when paid; ineligible deferred compensation is treated as received immediately; and interests in non-grantor trusts are taxed under separate rules. Certain tax-deferred accounts are treated as fully distributed on the day before expatriation.
There is also a separate inheritance-style charge: gifts or bequests later made by a covered expatriate to a US person can trigger a tax in the hands of the recipient, so the consequences can outlast the expatriation itself.
Planning before you expatriate
Because covered-expatriate status turns on tests measured at the expatriation date, timing and preparation matter. Getting fully compliant with the last five years of US filings can take someone off the compliance test. Where wealth is near the threshold, the composition and valuation of assets, and the treatment of pensions and trusts, all affect the outcome. The UK side matters too: the individual's UK residence position and any UK tax on the same assets should be considered so the two systems are not planned in isolation. This is a decision to model carefully and well in advance.
Frequently asked questions
Does everyone who renounces pay the exit tax?
Does giving up a green card count?
How is the exit tax calculated?
Can I be caught even if I'm not wealthy?
How does my UK position interact with this?
Considering renouncing US citizenship?
The exit tax is complex and the decision is irreversible. We model covered-expatriate status and the exit charge alongside your UK position so you can decide with the full picture. Speak to us well before you act.
Speak to a cross-border tax specialist