If you’re not familiar with U.S. taxes, the idea of an “Exit Tax” might sound confusing. Different rules apply according to the date upon which you expatriated, so be sure that you have checked your exact expatriation date. The article is based on the ruling for the expatriation on or after June 17, 2008. Let’s break it down in simple terms.

What is the Exit Tax?

The U.S. exit tax is a tax that applies to people who decide to give up their U.S. citizenship or long-term residency. It’s a tax on everything you own worldwide, from property to personal items like cars, boats, and jewelry. Most people who owe this tax are U.S. citizens or long-term residents who meet certain criteria.

Who Has to Pay the Exit Tax?

To determine if you need to pay the exit tax, the U.S. government will check if you are what they call a “covered expatriate.” The American Jobs Creation Act (AJCA) of 2004 amends IRC section 877. Whether you are a U.S. citizen or a long-term resident, this status depends on three main factors, if any of them apply:

1. Net Worth: If your personal net worth exceeds $2 million when you renounce your citizenship or long-term residency, you will be considered a covered expatriate. To calculate your net worth, the IRS will add up the value of all of your belongings (including unrealized capital gains) and treat them as if you’d sold them all on the day of expatriation. In almost all cases, the IRS will look at the market value of these assets on the day you give up your status. The value of an asset will be determined by the current fair market value.
2. Annual Net Income Tax: If the average net income tax over the past five years exceeds a set threshold, you will be considered a covered expat. The exact threshold changes annually adjusted for inflation ($162,000 for 2017, $165,000 for 2018, $168,000 for 2019, $171,000 for 2020, $172,000 for 2021, $178,000 for 2022, and $190,000 for 2023) you become a covered expatriate. This is calculated considering your U.S. income tax liability, after foreign tax credits, for the five years ending before the date of expatriation. For 2022, you should use the amount shown on 2020 Form 1040 on line 24 less any amount reported on Schedule 3 (Form 1040), line 1.
3. Tax Filing Compliance: If you haven’t filed U.S. tax returns for the past five years, you automatically become a covered expatriate. You probably fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the five years preceding the date of your expatriation or termination of residency.

What If You Are a “Covered Expatriate”?

If you are a covered expatriate, you need to pay an exit tax on your worldwide assets. The IRS allows you to exclude, from the total value of your assets $600,000, which amount is to be adjusted for inflation for calendar years after 2008 (the “exclusion amount”). For calendar year 2023, the exclusion amount is $821,000. How much you pay depends on if you have any accounts or other assets remaining in the US: For some types of accounts, you have to file a form 8854 every year after expatriation, and the tax rate to your unrealized capital gains is 23.8%. With other accounts, you may have to file a form 1040NR (Non-Resident) tax return and be subject to a flat 30% tax on all income. You might even be subject to a 10% early withdrawal penalty from certain retirement accounts. Treaty elections will not help you as part of the renunciation process is that you agree to never be eligible for treaty benefits However, there are other potential downsides to being labeled as a covered expatriate.  For example, if you send money or gifts to family or friends in the U.S., they might have to pay taxes on those gifts.

What About Long-Term Residents?

If you’ve been a green card holder for eight out of the last fifteen years, you could also face the exit tax. The rules here are a bit tricky. For example, under certain conditions, you might be considered a long-term resident after only six years and two days in the U.S.

There are some exceptions, though. One common exception involves making a “treaty election,” which can stop the clock on how long you’ve been in the U.S. But be careful—if you make this election after you’ve already become a long-term resident, you might accidentally trigger the exit tax.

What Should You Do?

If you’re thinking about giving up your U.S. citizenship or long-term residency, it’s crucial to understand whether you might owe the exit tax. Filing the right forms, like Form 8854, and understanding your status can help you avoid unnecessary taxes and complications.

IRS is sending notices to expatriates who have not complied with the Form 8854 requirements, including the imposition of the $10,000 penalty where appropriate.

Relinquishing U.S. citizenship is irrevocable.

This tax is complex, so it’s often a good idea to consult with a tax professional who understands the exit tax and can guide you through the process.

US Tax Consultants  Phone +34 915 194 392