US Exit Tax (expatriation tax) 2026: Who pays, who doesn't, and what to file

Planning to give up your US citizenship or green card? The first question most people ask is: Will I have to pay exit tax?

Quick answer: Most people won’t owe an exit tax. You only owe if you are classified as a covered expatriate, which generally refers to individuals who meet certain wealth, tax liability, or compliance criteria.

Important: Exit tax thresholds and IRS rules change yearly, so what applied in 2025 may not apply in 2026. Keep this in mind when planning your expatriation.

But if your assets do exceed certain thresholds, the Internal Revenue Service (IRS) may treat it as if you sold everything the day before you leave and tax the gains. Harsh? It can be. And even if your assets aren't high, you could still be hit with the expatriation tax if you make mistakes during the expatriation process.

What is the US exit tax?

When US citizens or long-term green card holders decide to renounce their US citizenship or officially cut ties with the United States of America, the IRS expects all tax obligations to be settled first.

The exit tax, also known as the expatriation tax, is a federal tax applied when you give up your US citizenship or long-term residency (green card). It's the IRS's way of taxing your unrealized gains, treating it as if you sold all your assets the day before you leave the US tax system even if no actual sale took place.

This rule was introduced in 2008 to prevent high-net-worth individuals from avoiding future US taxes by simply renouncing their status.

Key terms to know:

• Deemed sale: The IRS treats your expatriation as if you sold all your worldwide property the day before you leave, even though no actual sale happens.
• Fair market value (FMV): The price your asset would sell for on the open market.
• Basis: Your original cost in the asset (purchase price plus improvements, minus depreciation).
• Unrealized gain: The increase in value from your basis to the current FMV profit you haven't actually received yet.

Who is subject to exit tax?

Exit tax applies only if you're a covered expatriate. Not everyone who gives up US citizenship or a green card ends up paying the exit tax. This tax targets a specific group the IRS calls covered expatriates.

Covered expatriate test (quick summary):

• Net worth $2 million, OR
• Average annual tax liability $211,000 (2026), OR
• Failed to certify 5 years of tax compliance

Who are covered expatriates?

You're considered a covered expatriate if you meet any of the following three tests at the time you expatriate.

Net worth test: If your total net worth is $2 million or more, you're a covered expatriate. This includes everything you own globally.

Average tax liability test: If your average annual US income tax liability for the five years before expatriation is more than $211,000 (for calendar year 2026), you're considered a covered expatriate. This threshold adjusts annually for inflation.

Certification test: Even if your net worth and tax liability are low, you can still be considered a covered expatriate if you fail to certify that you've met all your US tax obligations for the past five years. You do this on Form 8854, Initial and Annual Expatriation Statement. If you don't file this form, the IRS may automatically consider you a covered expatriate.

Edge cases to watch:

• Filing Form 8854 is mandatory even if you don't owe exit tax failure to file automatically makes you a covered expatriate regardless of your wealth or income
• If your net worth dropped below $2 million shortly before expatriation, the IRS requires a detailed explanation of all asset transfers during the prior 5 years
• Green card holders who've held their card for fewer than 8 of the last 15 years aren't considered long-term residents and typically don't face an exit tax

What about green card holders?

If you've held a green card for at least eight of the last 15 years, you're considered a long-term resident and subject to the covered expatriate rules. Whether or not you owe exit tax depends on the three tests outlined earlier.

Important: If a tax treaty treats you as a nonresident for US tax purposes, the year you make this election won't count toward the eight-year threshold.

Green card path:

1. Are you a long-term resident? (8 of the last 15 years as a green card holder)
   Yes → Covered expatriate tests apply (net worth, tax liability, certification)
   No →Exit tax rules likely don't apply, but you still need to file a final-year return and formally terminate your residency status
2. If yes: File Form 8854 and determine if you meet any of the three covered expatriate tests
3. If no: You may still have filing obligations (like Form 1040-NR for your final year), but expatriation tax rules generally don't apply

Exceptions: US exit tax for dual citizens at birth and minors

Yes. The exceptions are narrow, but if you qualify, they can help you avoid a large tax bill:

Dual citizens at birth: If you were born a citizen of both the US and another country, and you're still a citizen and tax resident of that other country, you may be exempt as long as you haven't lived in the US for more than 10 of the last 15 years.

Minors under 18: If you expatriate before you turn 18 and haven't been a US tax resident for more than 10 years, you can also avoid being classified as covered.

How to qualify (practical checklist):

• Prove dual citizenship at birth (birth certificates, passports)
• Show current tax residency in the other country (tax returns, residency documents)
• Document your physical presence history (fewer than 10 years in the US out of the last 15)
• File Form 8854 correctly, even if you qualify for an exception

Warning: These exceptions are narrow and fact-specific. If you think you qualify, get professional advice before expatriating to make sure you meet all the requirements.

How exit tax is calculated

If you're a covered expatriate, the default rule treats most of your worldwide property as if you sold it the day before you expatriate ("deemed sale"). You then pay US tax on the net unrealized gain, after a one-time exclusion.

For tax years beginning in 2026, the exclusion amount is $910,000. This amount adjusts annually for inflation.

Step-by-step exit tax calculation

Step 1 - List your assets and estimate fair market value (FMV): Typical assets: brokerage accounts, real estate, business interests, crypto, etc.

Step 2 - Calculate unrealized gain/loss for each asset: For each asset: FMV cost basis = gain (or loss).

Step 3 - Net the gains and losses together: Add all gains and subtract all losses to get total net gain.

Step 4 - Subtract the one-time exclusion amount: For 2026, the inflation-adjusted exclusion is $910,000. Taxable gain can't go below zero.

Step 5 - Apply the appropriate US tax rates: The remaining taxable gain is generally taxed at the rates that apply to the type of gain (often long-term capital gain rates; certain items may be ordinary). The exact rate depends on your situation.

Short examples

Example 1 (no exit tax after exclusion)

Asset A gain: $600,000
Asset B gain: $200,000
Asset C loss: $100,000
Net gain: $700,000
Minus 2026 exclusion ($910,000): $0 taxable gain no exit tax (on the mark-to-market piece).

Example 2 (taxable gain remains)

Total gains across assets: $1,400,000
Total losses across assets: $100,000
Net gain: $1,300,000
Minus 2026 exclusion ($910,000): $390,000 taxable gain taxed at the applicable capital gain/ordinary rates.

This approach is called the mark-to-market regime, and the IRS applies it to investments (stocks, bonds, and securities), real estate (property owned domestically or internationally), and other assets (pensions, collectibles, and other personal property).

Not all assets follow the same rules. For example, specified tax-deferred accounts and interests in non-grantor trusts may be taxed under different methods, with their own timing and withholding rules.

Covered expatriate? Don't forget Form W-8CE

If you're a covered expatriate with deferred compensation like a 401(k) or pension you must file Form W-8CE within 30 days of expatriation, or before the first distribution, whichever comes first. With this form, you'll notify your plan administrator that your account qualifies as eligible deferred compensation under US tax rules.

Who files W-8CE:

• Covered expatriates with US-based retirement accounts (401(k), IRA, pension)
• Must file within 30 days of expatriation or before first distribution

What happens if you don't:

• Your plan may be treated as ineligible deferred compensation
• The IRS could tax the entire account balance as if you received it all on your expatriation date
• You lose the benefit of deferring tax until actual distributions

Net investment income tax (NIIT)

Before you expatriate, any net investment income may also be subject to the 3.8% NIIT, if your income exceeds the threshold ($200,000 for single filers and heads of households). NIIT is about investment income (interest, dividends, capital gains), not wages or self-employment income.

NIIT doesn't apply after expatriation, but if you trigger large gains through the mark-to-market rule, it can increase your final US tax bill.

Do I still need to file any US taxes after paying exit tax?

If you keep having financial ties to the US even after you expatriate such as owning rental property, holding US investments, or receiving income from US-based pensions you may still owe tax on US-sourced income, just like any other nonresident. You may need to file Form 1040-NR and could be subject to a 30% nonresident alien withholding tax.

You may be eligible for treaty rates as a nonresident depending on the treaty, your residency, and the forms you file, but some special rules may apply for former citizens in certain treaties.

Form 8854 is filed with your final US return; annual filing can apply in limited cases (e.g., if you made a deferral election for exit tax).

Strategies to minimize or avoid exit tax

With the right tax planning, you may be able to reduce or even avoid the exit tax altogether.

If your net worth is close to $2 million, consider strategies to bring it below the threshold like gifting assets or restructuring holdings before giving up your citizenship or green card. Timing matters, too. If your average tax liability is trending downward, delaying your expatriation could help you fall below the threshold. But if you're expecting a large inheritance or asset sale, leaving before that event may be the smarter move.

If you're classified as a covered expatriate, any gifts or inheritances you leave to US citizens or residents can be subject to a 40% inheritance tax on gifts from expatriates, paid by the recipient. This is governed by Section 2801 of the Internal Revenue Code. The IRS has issued regulations and draft Form 708 materials for reporting these transfers. For 2026, the annual exclusion amount for Section 2801 is $19,000 per recipient (tied to the gift tax annual exclusion discussed in Form 708 instructions).

Failing to file or correct past tax returns is one of the most common reasons people become covered expatriates. Make sure you're fully compliant before submitting Form 8854.

Most common mistakes to avoid:

• Forgetting that losses offset gains (you net all assets together, not individually)
• Thinking the exclusion amount ($910,000 for 2026) applies per asset (it's a one-time exclusion for all assets combined)
• Lacking proper valuation support for FMV (get appraisals for real estate, business interests, and other hard-to-value assets)

Special assets cheat sheet: rules to watch

Exit tax isn't always a simple "sell everything on paper and pay capital gains." Certain assets like pensions, 401(k)s/IRAs, and trust interests can be taxed differently and may require extra documentation.

Renouncing US citizenship? Here's what else to consider

Remember that your renunciation is permanent. It can affect your ability to pass on citizenship to children, access certain US government services, or maintain business or legal ties with the United States.

Checklist of non-tax impacts:

Travel & re-entry

• You’ll need a visa to visit the US going forward.

Social Security benefits

• Benefits may still be paid to you as a non-citizen.
• Payment methods and accessibility vary by country of residence some countries have totalization agreements, others face restrictions.

Banking & investments

• US banks may close or restrict accounts for non-citizens.
• Brokerage firms often require you to transfer assets or close accounts.
• Plan to establish banking relationships in your new country of residence before renouncing.

Estate & gift planning

• If you are a covered expatriate and you give gifts or leave bequests to US persons, the recipient may owe 2801 tax (subject to exclusions/credits).
• Your own estate may still face US estate tax if you hold US-situs assets (real estate, US stocks).

Make your exit smooth – talk to a tax professional

The exit tax is complex – and getting it wrong can be costly. If you're unsure whether you qualify as a covered expatriate or how to calculate your potential tax liability, don’t guess. An experienced expat tax professional can help you make informed decisions.

Whether you're planning to renounce your US citizenship or wait and reassess, a tax advisor can guide you through the expatriation process and help you stay compliant. Our team will review your financials, assist with Form 8854, and develop a plan to reduce your tax exposure, so you can exit the US tax system with confidence.