The US Exit Tax: How It’s Calculated, Asset by Asset, and How to Minimize It

The US exit tax is a potentially large tax bill that can hit when renouncing your US citizenship or green card. But with good planning, you can often completely avoid or at least minimize it. 

Exit tax applies a different set of rules to different asset categories, like your brokerage account, your IRA, your 401(k), and your interest in a family trust. Some get a $910,000 exclusion. Some get none. Some are taxed immediately at ordinary income rates; some are taxed slowly, over decades, through withholding. Knowing which regime applies to which asset, before your expatriation date is set, is the planning opportunity to prevent an expensive surprise.

This guide covers the exit tax under IRC §877A in full: who pays it, the three covered expatriate tests in detail, the mark-to-market calculation with a case example, the separate rules for retirement accounts, deferred compensation, and trusts, the deferral election, and the planning strategies that still work once you know you’ll be covered.

If you’re still deciding whether to renounce at all, start with our complete guide to renouncing US citizenship. This post assumes that you already made the decision or are close to it.

Who pays the US exit tax?

Only covered expatriates pay the US exit tax. It applies to US citizens who renounce citizenship and to long-term residents (green card holders for at least 8 of the last 15 years) who give up their permanent residency, but only if they meet one of three covered expatriate tests. Most people who expatriate never owe it.

That last point deserves emphasis, because the fear of the exit tax stops many people from even analyzing their situation. If your net worth is below $2 million, your average US tax bill is modest, and your filings are clean, you will file the paperwork and owe nothing. 

The exit tax is a problem for a specific, definable group, and the first task is determining whether you’re in it.

Green card holders should note that the 8-of-15-year test has its own counting rules and its own traps. We cover those separately in our guide to the green card exit tax.

What makes you a “covered expatriate”? The three tests in detail

You are a covered expatriate if, on the date you expatriate, you meet any one of three tests: net worth of $2 million or more, average annual net US income tax liability above $211,000 (for 2026) over the five prior years, or failure to certify five years of full tax compliance on Form 8854. Meeting one test is enough. Married couples are tested individually.

Let’s look at each test in detail.

The net worth test: $2 million, worldwide, not indexed

Your net worth is measured on the day before expatriation and includes everything, everywhere:

• real estate
• investment accounts
• business interests
• crypto
• beneficial interests in trusts (which people routinely forget to count) 

Liabilities reduce net worth, so a $1.5 million property with an $800,000 mortgage contributes $700,000 to the test.

Two features make this test more dangerous than it looks. 

First, the $2 million threshold has not moved since 2008. It is not adjusted for inflation, so ordinary asset growth pulls more expatriates into scope every year. A professional couple with a paid-down home and two retirement accounts can cross it without ever feeling wealthy. 

Second, valuation happens at the end of the process, not the beginning. If you start planning at $1.9 million and markets rise while you wait for a consular appointment, you can cross the line before your date arrives.

The tax liability test: $211,000 in average tax, not income

You’re a covered expat if your average annual net US income tax liability for the five years ending before the expatriation year exceeds $211,000 (the 2026 threshold, adjusted annually for inflation). The test measures tax actually owed, not income earned.

That distinction is why many high earners abroad pass this test comfortably. If you live in a high-tax country and your foreign tax credits reduce your US liability to near zero, five years of large income can still produce a five-year average far below the threshold. 

Conversely, a founder with US-source capital gains and little foreign tax paid can trip the test in a way their salary never suggested. 

Calculating the average correctly, including how joint filings are attributed between spouses, is technical enough that we treat it as a formal analysis step rather than a back-of-envelope check.

The compliance test: the one that catches people regardless of wealth

You’re a covered expatriate if you cannot certify, under penalties of perjury on Form 8854, that you have met all US federal tax obligations for the five years before expatriation. This is the most common trigger and the least forgiving: it applies at any net worth and any income level, and filing Form 8854 late or not at all makes you covered automatically.

The good news is that it’s also the most fixable exit tax trigger. You can usually resolve non-willful delinquency through the IRS Streamlined Filing Compliance Procedures before you expatriate, typically without penalties. 

Cleanup must come first; certification looks backward five years from your expatriation date.

Covered expat exceptions: certain dual citizens and minors

Two narrow groups escape covered status even if they meet the net worth or tax liability tests: 

• individuals who were dual citizens from birth, remain citizens and tax residents of the other country, and were US residents for no more than 10 of the 15 years before expatriation; and 
• individuals who expatriate before age 18 and a half with the same 10-of-15-year limit. 

Both groups must still be tax compliant and file Form 8854. The exceptions excuse the wealth tests, but not the compliance test. This means that “accidental Americas” still need to catch up on missing tax filings before expatriating.

Covered expatriate status can have consequences beyond the exit tax itself. Under IRC §2801, certain gifts and bequests later received by US citizens or residents from a covered expatriate may be subject to a separate transfer tax, generally imposed on the US recipient.

This rule can apply years after expatriation and is an important consideration in the broader estate and succession plan, particularly where the expatriate expects to leave assets to US children, family members, or trusts with US beneficiaries.

How is the exit tax calculated? The mark-to-market regime

For covered expatriates, The IRS treats most worldwide assets as sold at fair market value on the day before expatriation and applies the following:

1. Gains and losses from this deemed sale are netted
2. The first $910,000 of net gain (the 2026 exclusion, adjusted annually) is excluded.
3. The remainder is taxed under the normal rules for each asset, generally at capital gains rates of up to 23.8% including the net investment income tax.

The controlling guidance is IRS Notice 2009-85, and three of its mechanics matter for planning:

The exclusion is allocated pro rata, not directed

You can’t point the $910,000 exit tax exclusion at your most appreciated asset. The exclusion is spread across every built-in-gain asset in proportion to each asset’s share of total gain. 

You’ll sometimes read advice suggesting you can “allocate the exclusion to your highest-growth assets.” You can’t. The allocation is mechanical, and planning around it means changing what you hold before the date, not choosing where the exclusion lands afterward.

Deemed losses count, and the wash sale rule is switched off

Assets with built-in losses reduce your net gain before the exclusion is applied, and Notice 2009-85 disregards the wash sale rule for the deemed sale. Loss positions have real value on your expatriation date.

Basis resets after deemed sale

Every asset that runs through the mark-to-market calculation takes a new basis equal to its deemed sale value. If you later actually sell, you’re taxed only on appreciation after the expatriation date. The exit tax accelerates gain; it doesn’t double-tax it.

One asymmetry to understand: liabilities reduce your net worth for the covered expatriate test, but they do not reduce your deemed gains. A mortgaged property helps you stay under $2 million; but it does not shrink the gain on that property in the exit tax calculation.

Exit tax calculation example

The following is a simplified hypothetical to show how the pieces interact. It is not tax advice for any specific situation.

Maria is a covered expatriate renouncing in 2026. She holds three assets: a brokerage account worth $2.4 million with a $1.2 million basis, a home abroad worth $900,000 with a $700,000 basis, and a traditional IRA worth $600,000.

Step 1: separate the regimes. The brokerage account and the home are mark-to-market assets. The IRA is a specified tax-deferred account and follows its own rule (next section). The exclusion does not apply.

Step 2: net the deemed gains. Brokerage gain: $1.2 million. Home gain: $200,000. Total mark-to-market gain: $1.4 million.

Step 3: allocate the exclusion pro rata. The brokerage account carries 86% of the gain, so it absorbs 86% of the $910,000 exclusion, about $780,000. The home absorbs the remaining $130,000.

Step 4: tax the remainder. Taxable deemed gain is $490,000 ($420,000 on the brokerage account, $70,000 on the home), taxed at capital gains rates.

Step 5: the IRA, separately. The IRS treats the full $600,000 as distributed the day before expatriation and taxes it as ordinary income, with no exclusion and no early-withdrawal penalty.

Maria’s exit tax bill has two very different components: roughly $490,000 of capital gain and $600,000 of ordinary income. 

Notice what planning could have changed: selling loss positions in the brokerage account first, timing the renunciation year, or addressing the IRA in the years before expatriation would each move the outcome. Nothing moves it after the date.

How are retirement accounts taxed at expatriation?

Retirement accounts are where the exit tax surprises people most, because they sit outside the mark-to-market regime and outside the $910,000 exclusion entirely. The treatment depends on the account type.

Specified tax-deferred accounts: IRAs, Roth IRAs, HSAs, 529s

These accounts are treated as fully distributed on the day before expatriation. The deemed distribution is taxed as ordinary income, the exclusion does not apply, and no early-distribution penalty is imposed. For a covered expatriate with substantial traditional IRA savings, this is often the largest single line of the exit tax.

Roth IRAs run through the same deemed-distribution mechanic, but under Roth distribution rules. This means, amounts that would be qualified and tax-free if actually distributed generally remain tax-free in the deemed distribution. The account’s age and your age both matter here, which makes Roth treatment a fact-specific question rather than an automatic tax hit.

The account’s basis adjusts after the deemed distribution, so the US doesn’t later tax actual withdrawals twice on the same value. But note the trap: if you take an actual early distribution instead of relying on the deemed one, normal early-withdrawal penalties apply.

401(k)s are not “specified accounts” but deferred compensation

A 401(k) is deferred compensation under §877A, along with 403(b)s, SEPs, pensions, restricted stock units, and similar arrangements. Deferred compensation splits into two categories, and the difference is worth real money.

Eligible deferred compensation avoids the immediate deemed inclusion. To qualify, the payor must be a US person and you must file Form W-8CE with the plan administrator within 30 days of your expatriation date. From then on, the IRS taxes distributions through a flat 30% US withholding as you actually receive them, and you permanently waive any treaty right to reduce that rate. 

For most people, spreading the tax over decades of retirement distributions beats paying it all at once, but the 30-day W-8CE window is unforgiving. Missing it converts the entire plan into the second category.

Ineligible deferred compensation are foreign pensions with non-US payors and plans where W-8CE wasn’t filed in time. The IRS taxes those immediately. It treats the present value of your accrued benefit as received the day before expatriation. Unvested benefits are treated as vested. 

Foreign pension schemes are a frequent source of unplanned exit tax for long-term expats, because the payor is almost never a US person and the eligible route is simply unavailable.

How are trusts treated for exit tax?

Interests in non-grantor trusts follow a different regime: no deemed sale at all. Instead, every future taxable distribution from the trust to you as a covered expatriate is subject to 30% US withholding, permanently, with no treaty relief available. 

The trust interest also counts toward your $2 million net worth test at its actuarial value, which is how trusts pull people into covered status in the first place.

If you’re the grantor of a trust, or treated as owner of a portion of one, that portion runs through the ordinary mark-to-market calculation instead.

Trust interests are where the exit tax and estate planning stop being separate issues. Restructuring before expatriation, or accepting the withholding regime with eyes open, is a design decision that belongs inside your broader wealth plan. 

Our estate, trust and asset protection practice handles this analysis together with the expatriation work, because sequencing the two independently is how the expensive versions of this mistake happen.

Can you defer the exit tax?

Yes, in part. §877A allows an irrevocable election to defer the mark-to-market tax on a specific asset until you actually sell it. The election is made asset by asset, requires adequate security (typically a bond or letter of credit), accrues interest until paid, and requires waiving treaty benefits that would interfere with collection.

The deferral election often makes sense in one situation: a large, illiquid position, most often a closely held business, where the deemed sale creates a tax bill with no cash to pay it. Posting security against the asset and paying when it eventually sells can be the only workable path.

Outside that situation, deferral is usually a poor trade. Interest runs against you, the security requirement is burdensome, and the tax still arrives eventually. For liquid portfolios, planning to reduce the gain before the date beats financing the tax after it. 

Note also that the deferral election covers only mark-to-market tax; you cannot defer the deemed distribution of an IRA this way.

How do you avoid covered expatriate status?

Avoiding covered status entirely eliminates the exit tax, the consequences for your US heirs, and most of the paperwork. Work the tests in order of leverage:

Fix compliance first

If the compliance test is your trigger, it’s usually the cheapest to solve. Streamlined Procedures, five clean compliance years, timely Form 8854. This step is mandatory anyway; it just also happens to be a covered-status cure for people under the wealth thresholds.

Time the five-year window

The tax liability test averages the five years before your expatriation year. If one anomalous year (a business sale, a large bonus, a Roth conversion) is inflating the average, letting it roll out of the window can change your status. 

The same logic runs forward: renouncing before a planned liquidity event keeps that gain out of the average and out of the deemed sale.

Reduce net worth below $2 million through gifting

This works, but the mechanics are strict and the timing rule is the one people often break. You should complete gifts intended to reduce your net worth no later than the calendar year before your renunciation year. The IRS may pull gifts you make in the year you expatriate back into the calculation. 

You should implement gifting strategies well before your planned expatriation date, since the analysis is often very fact-specific.

Within that constraint, the tools are the usual ones: the $19,000 annual exclusion per recipient (2026), the lifetime gift exemption ($15 million for 2026), unlimited gifts to a US citizen spouse, and gifts to a non-citizen spouse capped at $195,000 per year (2026) before gift tax applies.

Gifting appreciated assets does double duty, moving both net worth and future deemed gain out of your estate.

A warning that applies to all three levers: they require calendar years, not weeks. For the gifting strategy to work as meaningful net worth reduction, it needs to start at least two years before your intended date.

How do you minimize exit tax if you’ll be a covered expat anyway?

For some clients, no realistic plan avoids covered status. The goal then shifts from avoiding the tax to shrinking each of its components while you’re still a US person and can still leverage every US tax benefit.

Use the exclusions you’re about to lose

Selling your primary residence before expatriating can shelter up to $250,000 of gain ($500,000 married filing jointly) under the §121 exclusion, an option that disappears once the home runs through the deemed sale instead. 

Harvesting losses in taxable accounts reduces net deemed gain dollar for dollar before the $910,000 exclusion is even applied.

Address retirement accounts deliberately

Because a traditional IRA is deemed distributed at ordinary rates with no exclusion, the choice between converting to Roth in low-income years before expatriation, taking staged actual distributions, or accepting the deemed distribution is a genuine multi-year modeling exercise. 

The right answer depends on your bracket trajectory, your new country’s treatment of US retirement income, and how many years of runway you have. For 401(k)s, the priority is simpler: preserve eligible treatment by calendaring the Form W-8CE deadline before anything else.

Split assets by embedded gain, not just by location

In the one-spouse-renounces strategy (covered in our renunciation guide), the expatriating spouse should hold the low-gain assets, cash, recently purchased property, loss positions, while the US spouse retains the highly appreciated US assets that would otherwise be deemed sold. 

Inter-spousal transfers have their own timing and gift tax considerations, so this is built years out, not months.

Give appreciated assets to charity

Charitable transfers of appreciated positions reduce net worth and remove the embedded gain from the deemed sale entirely, while you can still claim the US deduction.

Get valuations that will hold

For closely held businesses and other hard-to-value assets, a defensible appraisal, including appropriate discounts for lack of control or marketability, directly reduces the deemed gain. This is a place where spending on quality valuation work has one of the highest returns in the entire plan.

Every strategy in this section has a deadline attached to your expatriation date. Several strategies have timelines of a full year or more. The cost of sequencing this wrong is almost always higher than the cost of getting it right the first time. Speak to a senior advisor who has planned this timeline before.

Quick answers: The US exit tax

Is there an exit tax if I’m not a covered expatriate?

No. If you meet none of the three tests, no exit tax applies, regardless of what you own. You must still file Form 8854 with your final return to report the expatriation and certify compliance; skipping it makes you a covered expatriate automatically.

What is the US exit tax rate?

There is no single exit tax rate. Net deemed gains above the $910,000 exclusion (2026) are taxed at capital gains rates, up to 23.8% including the net investment income tax. Deemed distributions of IRAs and similar accounts are taxed at ordinary income rates. Ineligible deferred compensation is taxed at ordinary rates on its present value.

Does the $910,000 exclusion cover my IRA or 401(k)?

No. The exclusion applies only to mark-to-market assets like investment accounts, real estate, and business interests. IRAs, Roth IRAs, HSAs, and 529s are deemed fully distributed and taxed as ordinary income with no exclusion. 401(k)s follow the deferred compensation rules, where the exclusion also doesn’t apply.

Do my debts reduce the exit tax?

Only indirectly. Liabilities reduce your net worth for the $2 million covered expatriate test, which can keep you out of the exit tax entirely. But if you are a covered expat, liabilities do not reduce the deemed gain on any asset; the calculation uses fair market value against basis, ignoring what you owe.

Can I pay the US exit tax later instead of at expatriation?

Partially. An irrevocable election under IRC §877A lets you defer the mark-to-market tax on specific assets until actual sale, but you must post security, pay interest, and waive treaty benefits. You cannot defer the deemed distribution of retirement accounts this way. Deferral mainly makes sense for illiquid assets like closely held businesses.

Does the exit tax apply to green card holders?

Yes, if you’re a long-term resident, meaning a green card holder for at least 8 of the 15 years ending with the year you give up your status. Long-term residents face the same covered expatriate tests and the same exit tax regimes as citizens. We cover the counting rules and planning options in our green card exit tax guide.

Getting the exit tax right before you set the date

The exit tax rewards one thing above all: lead time. Nearly every lever, gifting years, loss harvesting, Roth conversions, W-8CE deadlines, spousal asset shifts, has to be pulled before the day you stand in front of a consular officer. Once the date passes, the calculation is arithmetic.

If you might be a covered expatriate, the analysis is worth doing 18 to 24 months before you intend to expatriate, while every option is still open. At GEA, we model covered status, run the asset-by-asset calculation, and sequence the planning steps as one integrated timeline. 

Speak to a senior advisor to see what your exit tax picture actually looks like, and what can still change it.

This article is for general educational purposes and reflects guidance current as of August 2026. Tax law and thresholds change frequently. The right approach for your situation depends on facts specific to you. To discuss your circumstances with an advisor, speak to a senior advisor on the GEA team.