The exit tax or expatriation tax pursuant to Sec. 887A of the Internal Revenue Code (IRC) is an income tax on unrealized capital gains and is assessed when certain individuals renounce their U.S. citizenship or green card.
Covered Expatriates
A covered expatriate is an individual who either renounces their U.S. citizenship, or who renounces or loses the status of a long-term lawful resident of the United States. A long-term lawful resident is a foreigner who held a U.S. Green Card for at least eight out of the last fifteen years. If such an individual meets one of the following three criteria, the IRS assesses the exit tax:
- The expatriate has a net worth of at least USD 2,000,000. All assets worldwide need to be counted. The net worth is always assessed individually, even if the expatriate is married and used to file a joint tax return.
- The expatriate’s average annual income tax liability over the last five years exceeded USD 190,000 (for expatriation in 2023). This threshold is adjusted annually for inflation.
- The expatriate fails to provide a proof of compliance with all their tax obligations over the last five years. Whoever failed to file an income tax return, FBAR report or any other tax-related document within the last five years is subject to exit taxation.
All individuals losing or renouncing U.S. citizenship or a U.S. Green Card or comparable long-term resident status need to file Form 8854. Based on the information provided on this form, the IRS verifies whether an expatriate is covered by Sec. 887A.
Calculation of the Exit Tax
The base for calculating the exit tax are all unrealized capital gains a taxpayer has accrued. All assets of the expatriate are deemed as sold for their fair market value on the effective date of the expatriation. This hypothetical transaction might result in hypothetical profits.
The amount of these hypothetical profits is then reduced by the exit tax allowance, which is annually adjusted for inflation (USD 767,000 in 2023). The amount exceeding the allowance is then taxed as realized capital gains.
Deferring the Payment
Taxpayers can elect to defer the payment of the exit tax assessed if they provide the IRS with adequate security. The tax then becomes due once the assets are disposed of or the taxpayer dies.