How Much Is the U.S. Exit Tax & How Is It Calculated?
Understand the U.S. exit tax: its scope, the assets it affects, and the specific calculations involved when relinquishing U.S. tax residency.
The U.S. exit tax is a financial measure applied to certain individuals who relinquish U.S. citizenship or terminate long-term residency. It broadly applies to those with significant financial ties to the United States, even if they no longer reside there. This tax prevents high-net-worth individuals from avoiding U.S. taxation on unrealized gains by changing their citizenship or residency, ensuring they settle tax obligations on accumulated wealth before departing the U.S. tax system.
Determining Covered Expatriate Status
The U.S. exit tax primarily applies to individuals classified as “covered expatriates.” An individual becomes a covered expatriate if they meet any one of three specific tests on the date of their expatriation. If none of these tests are met, the individual is not considered a covered expatriate and is not subject to the exit tax.
One test for covered expatriate status is the Net Worth Test. An individual meets this test if their worldwide net worth is $2 million or more on the date of expatriation. This threshold is not adjusted for inflation. The calculation of net worth includes all assets, such as real estate, investments, and personal property, valued at their fair market value.
Another criterion is the Net Income Tax Liability Test. An individual is a covered expatriate if their average annual net income tax liability for the five tax years ending before expatriation exceeds an inflation-adjusted amount. For 2025, this threshold is $215,000. This test considers the actual tax paid, not gross income.
The third test is the Certification of Compliance Test. An individual becomes a covered expatriate if they fail to certify on Form 8854 that they have complied with all U.S. federal tax obligations for the five tax years preceding expatriation. This certification is a mandatory requirement for all individuals expatriating. Failing to provide this certification automatically triggers covered expatriate status.
Limited exceptions to covered expatriate status can result in no exit tax liability. Certain dual citizens from birth may be exempt if they meet specific residency requirements, such as being a citizen of another country at birth and not being a U.S. resident for more than 10 years during the 15-year period ending with the tax year of expatriation. Additionally, certain minors who expatriate before age 18½ can be exempt from covered expatriate status.
Assets Subject to Mark-to-Market Rules
The exit tax calculation identifies assets under the “mark-to-market” rule. This rule treats most property held by a covered expatriate as if it were sold for its fair market value on the day before the expatriation date. This hypothetical sale triggers a taxable event, even if no actual sale occurs. The purpose of this rule is to tax unrealized gains accrued while an individual was subject to U.S. taxation.
Assets subject to mark-to-market treatment include real estate (primary residence, investment properties), stocks, bonds, and other securities. Business interests, including partnership interests or shares in privately held companies, also fall under this rule. All are valued at their fair market value on the day prior to expatriation.
Tangible personal property of significant value, such as art, jewelry, or collectibles, also falls under these rules. Cash and cash equivalents are generally not subject to the mark-to-market rule unless they are part of a larger asset or business interest that undergoes the deemed sale. The concept of “fair market value” refers to the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.
Calculating the Deemed Gain and Tax Liability
Calculating the U.S. exit tax liability involves determining the deemed gain from mark-to-market assets. This process begins by establishing the fair market value (FMV) of all property subject to the mark-to-market rule as of the day preceding expatriation. The adjusted basis of each asset is also determined, representing its cost plus improvements or minus depreciation.
The gross deemed gain is calculated by subtracting the adjusted basis from the fair market value for each asset. After totaling these individual gains, a statutory exclusion amount is applied to reduce the overall taxable gain. For 2025, this exclusion is $890,000 and is adjusted annually for inflation.
Subtracting the exclusion amount from the gross deemed gain yields the net deemed gain. This net deemed gain is taxed as either ordinary income or capital gains, depending on the asset’s nature and holding period, at rates applicable in the year of expatriation. Short-term capital gains (assets held for one year or less) are taxed at ordinary income rates, while long-term capital gains (assets held for more than one year) are subject to lower capital gains tax rates.
Special Asset Categories and Their Tax Treatment
While the mark-to-market rule applies broadly, certain asset categories receive distinct tax treatment under the exit tax regime. These assets are excluded from the general mark-to-market calculation and have their own specific tax mechanics.
Deferred compensation items are treated as either eligible or ineligible. Eligible deferred compensation, from U.S.-based plans like 401(k)s, 403(b)s, or 457 plans, is subject to a 30% withholding tax on distributions received after expatriation. To qualify, the expatriate must notify the payer and irrevocably waive any treaty benefits. Ineligible deferred compensation, including foreign pension plans and vested but unexercised stock options, is treated as if its present value were received as a lump sum on the day before expatriation, making it immediately taxable at ordinary income rates.
Specified tax-deferred accounts, such as IRAs, Roth IRAs, HSAs, and 529 plans, are treated as if distributed in full on the day before expatriation. Their entire value is included in the covered expatriate’s taxable income for that year, with no mark-to-market exclusion. While taxed, early withdrawal penalties do not apply to these deemed distributions.
Interests in non-grantor trusts have special rules. Unlike other assets, no gain is recognized on the expatriation date for these trusts. Distributions from a non-grantor trust to a covered expatriate are subject to a 30% withholding tax at the time of distribution. This applies to the taxable portion, which includes income and accumulated income. The trustee is responsible for applying this withholding.