What the Exit Tax Is, and Why Status Matters More Than the Bill
When you give up US citizenship, or give up a green card you have held for many years, US law can treat you as if you sold everything you own the day before you leave, at its full market value, and it taxes the gain. That is the exit tax. The first $910,000 of gain is free for 2026 (the figure is adjusted each year), so for a lot of people the tax on the sale itself is small or zero.
Here is the part that matters, and the part almost everyone gets wrong. The exit tax only reaches a "covered expatriate." Whether you are covered is a yes-or-no status, and that status, not the size of the sale, is what drives the real cost. You can owe zero on the deemed sale and still be covered, and being covered puts a 40% tax on everything you ever give your US children afterward. So the short version is this: the goal of good planning is rarely to shrink the exit-tax bill. It is to keep you from being covered in the first place, because that is what protects your family.
Who Counts as a Covered Expatriate: the Three Tests
You are covered if any one of these is true on the day you expatriate. Just one is enough.
- The $2 million test. Your net worth is $2 million or more. This number has not been raised since 2008, so it is not the "wealthy only" line people assume. A paid-off Florida home, a retirement account, and a brokerage account routinely add up past it.
- The income test. Your average annual US income tax over the last five years is more than $211,000 for 2026. This one is indexed and catches high earners even without a big net worth.
- The compliance test, and it is the sleeper. You cannot certify, on Form 8854, that you filed everything correctly for the last five years. A single missed tax return, foreign-gift form, or foreign-company form in that window makes you covered no matter how little you own or earn. Someone with almost no assets can be covered purely by a paperwork gap. (The FBAR is technically a separate, non-tax filing that sits outside this certification, but fix it in the same pass, because it draws the same scrutiny.)
The lesson from the third test is the one to carry: clean up any late filings before you expatriate, not after, because once you have expatriated it can be too late to certify. That cleanup is usually a streamlined filing, which we cover in our guide to the streamlined filing compliance procedures and our page on FBAR penalties and how to fix late FBARs.
The Green-Card Trap: You May Be Expatriating Without Knowing
The exit tax is not just a citizenship problem. If you held a green card in at least 8 of the last 15 years, the law treats you as a "long-term resident," and giving up that status runs the exact same three tests and the exact same exit tax as a citizen who renounces. Partial years count as full years, so the clock runs faster than people expect.
Two traps live here. First, "giving it up" is broader than filing the formal abandonment form. If you are past your 8-year mark and you claim to be a tax resident of another country under a tax treaty, that claim can itself count as expatriating, and trigger the exit tax, even though you did nothing at immigration. The same treaty move made before year 8 is a shield; made after, it is a trap. Second, and the reverse mistake: simply letting your card expire, or moving abroad, does not end your US tax duties. A green-card holder stays a US taxpayer on worldwide income until the status is formally ended or determined abandoned. Courts have enforced exactly that, and hundreds of thousands of people sit in that limbo, still taxed, still adding long-term-resident years. Before any green-card client moves or surrenders a card, we count the 8-of-15 clock first, because it decides everything.
Your IRA and Pension: Often the Biggest Hit
People brace for the deemed sale of their house or their stocks, but the $910,000 exclusion softens that. The number that ambushes them is retirement money.
The day before you expatriate, a traditional IRA and similar tax-deferred accounts (including 529 college plans, health savings accounts, and Coverdell accounts) are treated as fully cashed out. The entire balance becomes ordinary income in that one year, taxed at regular rates. There is no 10% early-withdrawal penalty, but there is also no relief from the $910,000 exclusion: that exclusion only applies to the gain on the deemed sale of your other property, not to your retirement accounts. A $1.5 million traditional IRA turns into $1.5 million of income all at once. Being a Florida resident helps here, since Florida adds no state income tax on top, but the federal hit is real.
Employer pensions and deferred compensation follow their own rules. Some can keep deferring if you file a specific notice (Form W-8CE) with the payer in time and accept a flat 30% withholding on each future payment; miss the notice and the whole value can be taxed immediately. Interests in family trusts are not cashed out, but every later distribution to you is hit with 30% withholding. These moving parts are why a covered expatriate needs the numbers modeled before choosing a date, ideally with pre-expatriation moves like spreading retirement draws or Roth conversions across earlier years while you are still a citizen.
Thinking about renouncing, or giving up a green card?
A free 30-minute consult screens whether you would be a covered expatriate, counts your green-card clock, and maps what to fix before the date that locks it in.
Book your free consultThe 40% Tax on Gifts to Your US Family, Forever
This is the hidden half of expatriation, it is now in force, and it is the real reason covered status matters. Once you are a covered expatriate, any gift or inheritance you later leave to a US citizen or resident is taxed at 40% in that person's hands, on the amount above a $19,000 annual exclusion, and reported on a form called Form 708.
Read that again, because it inverts what people expect. The tax is paid by your US child or grandchild who receives the money, not by you. It has no end date: it follows you for the rest of your life and reaches your estate, wherever in the world the property sits. And it does not give the recipient a stepped-up basis, so your heir can pay 40% when they receive an asset and then capital-gains tax again when they sell it. There is a burden-of-proof twist too: the law presumes the person you gave to owes the tax unless you authorized the IRS to confirm your status, so the paperwork that protects your family should be signed while you are alive and able to cooperate. Gifts to a US-citizen spouse, gifts to charity, and property already reported on your final US returns are exceptions. Everything else to your US family is exposed. That is why, when covered status can be avoided, avoiding it does more for your children than any exit-tax planning could. If you are on the receiving end, or a parent or grandparent has already expatriated, the recipient-side playbook (Form 708, the June 15, 2027 first deadline, and the defenses) is in our guide to the Section 2801 forever tax.
How to Avoid Covered Status: the Real Planning
Because the entire regime, the exit tax and the 40% family tax alike, only fires from covered status, the whole game is to not be covered. There are three levers, and all of them have to be pulled before the day you expatriate.
- Get your net worth under $2 million through lawful lifetime gifting, done while you are solvent and not to dodge a known creditor. This is a middle-market move: for a genuinely large estate, giving away enough to clear the $2 million line can burn more than it saves, and the better plan is to accept covered status and focus on the recipient side.
- Lock down five clean compliance years so you can sign the Form 8854 certification. If you are behind, we fix the late filings first, usually through a streamlined program, so the certification is honest and signable.
- Fit a narrow exception. People who were citizens of both the US and another country at birth, and are taxed as residents of that country, or who relinquish before turning 18 and a half, can escape covered status even over $2 million. Both still require filing Form 8854 and certifying five clean years.
If you are going to be covered no matter what, the plan shifts to the family side: keeping annual gifts under the $19,000 exclusion, using the spouse and charity exceptions, and timing transfers with an eye on that 40% tax. Which path fits depends entirely on your numbers, and the whole thing is a before-you-leave exercise.
Renouncing in Practice: the CLN and the $450 Fee
Renouncing citizenship is a formal act: you take an oath before a US consular officer abroad. It is one kind of a broader category the law calls relinquishing, which covers several voluntary acts that give up citizenship. Once it is done, the State Department issues a Certificate of Loss of Nationality, and that certificate is the document that proves you are no longer a citizen.
Two practical points. First, the fee. The consular processing fee was cut from $2,350 to $450, effective April 13, 2026, so a lot of the older guidance online overstates it. Second, and more important, the nationality step and the tax step are two different things. The IRS does not issue any "certificate of expatriation." Ending your citizenship at the consulate does not end your tax obligations by itself; you still file Form 8854 with your final US tax return to close out the tax side, and it is that filing, not the oath, that settles whether you were covered.
How We Work, and When We Co-Counsel
Expatriation is specialized work with a lot of moving pieces, so we are clear about where our role sits. The screening that tells you whether you would be covered, the 8-of-15 green-card count, the five-year compliance cleanup, and the family and estate planning on the recipient side are handled here. The deemed-sale modeling and the specialized federal forms (8854, W-8CE, and a recipient's Form 708) we co-counsel with an international tax advisor, and any Israeli or other foreign-country tax is handled by qualified foreign counsel. We tell you up front which pieces your matter needs.
Where this meets our Florida practice is the recipient side. When a US family here in Florida stands to inherit from someone who has expatriated, or a covered expatriate wants to protect US children from that 40% tax, that is estate planning, and it is what we do. Most of this runs remotely, by phone and video, which suits clients who are out of state or out of the country, including the many Americans living in Israel who reach this decision after years of foreign-account fatigue. The first and most valuable step is the screen, because it decides everything that follows. See the full international tax planning hub → The mirror image, planning before you become a US person, is pre-immigration tax planning.
Frequently Asked Questions
What Is the US Exit Tax?
The exit tax is what the law calls the section 877A tax on expatriation. When certain people give up US citizenship or a long-held green card, the law treats them as having sold everything they own the day before they leave, at fair market value, and taxes the gain. The first $910,000 of gain is excluded for 2026, so many people owe little or nothing on the sale itself. But the tax only applies to a "covered expatriate," and being covered carries a second, larger consequence for your family that most people never hear about until later.
Who Is a Covered Expatriate?
You are a covered expatriate if any one of three things is true on the day you expatriate. First, your net worth is $2 million or more (this figure has not been raised since 2008, and a paid-off home plus a retirement account often clears it). Second, your average annual US income tax over the last five years is above $211,000 for 2026. Third, and the one people miss, you cannot certify five clean years of US tax compliance on Form 8854. A single missed tax return, foreign-gift form, or foreign-company form in the last five years can make you covered no matter how little you own.
Does Giving Up a Green Card Trigger the Exit Tax?
It can, and this surprises people. A green-card holder who held the card in at least 8 of the last 15 years is a "long-term resident," and giving up that status runs the same three covered-expatriate tests and the same exit tax as a citizen who renounces. What counts as giving it up is broader than filing the formal abandonment form: claiming to be a tax resident of another country under a treaty can itself count as expatriating once you are past that 8-year mark. And simply letting a card expire or moving abroad does not end US tax residency. We count the 8-of-15 clock before any green-card client makes a move.
How Much Does the Exit Tax Cost?
It varies enormously, because the headline "deemed sale" is often not the biggest number. The gain on your assets is sheltered by the $910,000 exclusion, so for many people that piece is small. The larger cost is usually your retirement accounts: a traditional IRA or similar account is treated as fully cashed out the day before you leave, taxed as ordinary income on the whole balance in one year, and the $910,000 exclusion does not shelter that. A $1.5 million IRA becomes $1.5 million of income at once. The honest answer is that the number depends on what you own and how it is held, which is exactly what the planning is for.
What Is the 40% Tax on Gifts to My US Family?
This is the hidden half of expatriation, and it is now live. Under section 2801, once you are a covered expatriate, any future gift or inheritance you leave to a US citizen or resident is taxed at 40% in the recipient's hands, on the amount above the $19,000 annual exclusion, reported on Form 708. The person who pays is your US child or heir, not you, and it lasts for the rest of your life and applies to your estate, wherever the property sits. It does not even give the recipient a stepped-up basis, so they can pay 40% now and capital-gains tax again later. This is why avoiding covered status, when you can, protects your family more than the exit-tax math does.
Can I Avoid Being a Covered Expatriate?
Often, yes, if you plan before you expatriate rather than after. Because the whole regime, including the 40% family tax, only fires from covered status, the goal is to not be covered. The levers are: bring your net worth under $2 million through lawful lifetime gifting while you are solvent, lock down five clean years of tax compliance so you can sign the Form 8854 certification (we fix late filings first), or qualify for a narrow exception for people who were dual citizens at birth or who relinquish young. For a genuinely large estate, gifting your way under $2 million can cost more than it saves, and the better plan is to accept covered status and plan the recipient side. Timing is everything, and every lever has to be pulled before the expatriation date.
How Much Does It Cost to Renounce US Citizenship?
The State Department fee to process a renunciation was reduced from $2,350 to $450, effective April 13, 2026. You take an oath before a US consular officer abroad, and the government issues a Certificate of Loss of Nationality, which is the document that proves the loss of citizenship. That nationality step is separate from the tax step: the IRS issues no "certificate of expatriation," and you still have to file Form 8854 with your final return to close out the tax side. Many older articles still quote the $2,350 figure, so it is worth confirming the current fee before you rely on it.
Do You Handle Exit-Tax Cases In-House?
We handle the parts that decide the outcome and are honest about the rest. The screening that tells you whether you are covered, the 8-of-15 green-card count, the five-year compliance cleanup, and the family or estate planning on the recipient side are handled here. The deemed-sale modeling and the specialized federal forms (8854, W-8CE, and the recipient's Form 708) we co-counsel with an international tax advisor, and any Israeli or other foreign-country tax is handled by foreign counsel. We tell you which pieces your matter needs before you commit to anything.
Common Situations
The oleh who renounces after years of fatigue. An American who made aliyah a decade ago is worn down by foreign-account reporting and wants to renounce. A quick screen shows his paid-off apartment and savings put him over the $2 million line, so he would be covered, which would tax his retirement account in one year and expose future gifts to his US-citizen daughter to the 40% tax. Because he came in early, there is room to plan the retirement draws and the gifting before he sets a date, rather than discovering it after.
The green-card holder who "let the card lapse." A professional who moved back home years ago assumed her expired green card ended everything. In fact she is still a US taxpayer, has quietly passed her eighth long-term-resident year, and a treaty claim her accountant filed may have triggered the exit tax without anyone noticing. Counting the 8-of-15 clock and reviewing the treaty position is the first thing that has to happen.
The US child on the receiving end. A Florida family learns that a parent abroad expatriated years ago and is a covered expatriate. Every gift and the eventual inheritance to the US children carries a 40% tax that they, not the parent, will owe, with no basis step-up. The planning now is to secure the parent's cooperation and records while they are living, use the annual exclusion and marital and charitable exceptions, and structure what can be structured.
Sources of Law
- Exit tax and covered-expatriate definition: 26 U.S.C. §877A (mark-to-market deemed sale; $910,000 exclusion for 2026 per Rev. Proc. 2025-32); §877(a)(2) (the $2,000,000 net-worth and average-income-tax tests, and the five-year certification); §877A(d) to (f) (deferred compensation, specified tax-deferred accounts, and trust interests). Forms 8854 and W-8CE. law.cornell.edu
- Long-term residents and green-card cessation: 26 U.S.C. §877(e); §7701(b)(6) (when lawful permanent residency ends, including the treaty-resident rule); Notice 2009-85. Green-card holder remains taxable until formal abandonment: Topsnik v. Commissioner, 146 T.C. 1 (2016).
- The 40% tax on US recipients: 26 U.S.C. §2801 and the final regulations, T.D. 10027, 26 C.F.R. Part 28 (covered gifts and bequests received on or after January 1, 2025; 40% rate; $19,000 annual exclusion; Form 708; marital, charitable, and already-reported exceptions; no basis step-up). law.cornell.edu
- The renunciation fee and proof of loss of nationality: consular processing fee reduced to $450 effective April 13, 2026, Fed. Reg. 2026-04931; Certificate of Loss of Nationality (Form DS-4083). Immigration and Nationality Act §349.
- Constitutional status of the deemed-sale tax (awareness only): Moore v. United States, 602 U.S. 572 (2024) (upholding a realized-income tax and reserving taxes on unrealized appreciation). (retrieved 2026-07-16)
Updated on July 16, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. Attorney Kevin Klagge represents families, businesses, and international clients in estate planning and international law, with a focus on Florida legal tools. He litigates estate and business issues in court. This article is general information about US law, not legal or tax advice, and does not create an attorney-client relationship. Expatriation is specialized; the deemed-sale modeling and Forms 8854, W-8CE, and 708 are co-counseled with an international tax advisor, and foreign-country tax is handled by foreign counsel. Federal figures are adjusted periodically and may change. Your result depends on your specific facts.