US exit tax guide: capital gains, deferred income & long-term assets (2026)

The US exit tax may be one of the most feared and misunderstood concepts in expat financial planning. Ask most people what it is, and they'll tell you it's an enormous tax bill you face when you give up your citizenship. Ask them who pays it, and they'll say anyone who leaves.

Neither of those things is true.

The exit tax applies only to a specific, defined category of person: a "covered expatriate" as determined by the IRS under IRC 877A. The majority of Americans who renounce citizenship or relinquish a long-term Green Card never cross the relevant thresholds and never owe it. For those who do, the calculation isn't a single flat tax on everything; different asset classes are treated in fundamentally different ways, and the difference matters enormously depending on how your wealth is structured.

This guide covers who qualifies as a covered expatriate, how the deemed-sale calculation works, and, most importantly, how capital gains, deferred compensation, retirement accounts, and trust distributions are each treated differently under the exit tax rules.

What the exit tax is, and who it doesn't apply to

The US exit tax, formally the expatriation tax under IRC 877A, treats expatriation as a deemed sale, the IRS acts as if you sold all your worldwide assets the day before you renounce citizenship or relinquish a long-term Green Card, and taxes any unrealized gains above an annual exclusion amount. 

For 2026, the first $910,000 of unrealized gains is excluded; any gains above that threshold are subject to US capital gains tax. The tax is not on the total value of your assets, only on the appreciation above what you paid for them. 

But here's what most coverage doesn't lead with: the exit tax applies only to people who meet the definition of a covered expatriate. Many US expats never cross the income, net worth, or compliance thresholds, so they renounce without ever owing it. The feared "massive tax bill" is real for a specific, high-net-worth segment, for the majority of people considering renunciation, it simply doesn't apply.

One important distinction before going further: this article covers only the federal expatriation tax under IRC 877A. California has separately proposed a state-level exit tax on departing residents: that's a different, currently unenacted concept covered in our California exit tax guide. Don't confuse the two.

Renouncing US citizenship: tax implications and what to expect

The three covered expatriate tests

Covered expatriate status is determined by meeting any one of three tests. You don't have to meet all three — a single trigger is enough.

Test 1: Net worth

You are a covered expatriate if your total worldwide net worth is $2 million or more on the date of expatriation. Net worth includes property, investments, business interests, retirement accounts, and other assets worldwide, reduced by liabilities such as mortgages, loans, and debts.

Important note: liabilities reduce your net worth for the $2 million test, but they do not reduce your unrealised gains for exit tax calculation purposes. For example, if you own a property worth $1 million with a $700,000 mortgage, the net worth calculation uses $300,000 - but the exit tax calculation uses the full $1 million fair market value when calculating unrealized gains. This distinction catches many people off guard. 

The $2 million threshold does not adjust for inflation. Someone whose net worth sits near $1.8–1.9 million should model this carefully in the years before any planned expatriation.

Test 2: Average annual tax liability

For 2026, you are a covered expatriate if your average annual US net income tax liability for the five years preceding expatriation exceeds $211,000: adjusted annually for inflation. For those who expatriated in 2025, the threshold was $206,000.

This test catches high earners who may not have $2 million in assets but who owe substantial US tax year over year. It's the average over five years, not a single year, meaning one anomalous high-income year doesn't automatically trigger coverage, but sustained high earnings do.

Test 3: Compliance failure, the trap most people miss

Even if you fall below both financial thresholds, you become a covered expatriate if you cannot certify that you have been fully tax-compliant for the five years preceding expatriation. This certification is made on Form 8854. 

Failing to file Form 8854 automatically makes you a covered expatriate, even if you wouldn't otherwise qualify based on net worth or income. The IRS doesn't just penalize you for not filing; it treats you as covered. The penalty for a missing or incorrect Form 8854 is $10,000, and, more consequentially, your US tax residency remains active in the IRS's view until the form is filed.

This means someone with modest net worth and modest income can still face covered expatriate status and all its consequences, simply because of unfiled returns or missed FBAR filings from years past. If you're behind on US tax filings, IRS Streamlined Procedures may help you catch up before expatriating, this is worth investigating early, well before any renunciation appointment. 

Two narrow exceptions: Dual citizens at birth who continue to be taxed as residents of their other country and who were US residents for no more than 10 of the last 15 years, and minors who expatriated before age 18½ under similar conditions, may avoid covered expatriate status, but they must still file Form 8854 and certify tax compliance. Without that certification, the exception doesn't apply.

How the deemed-sale calculation works

If you are a covered expatriate, the exit tax calculation begins with a deemed sale: the IRS treats all your worldwide assets as sold at fair market value on the day before your expatriation date. You owe tax on the unrealized gains, the appreciation above your adjusted cost basis, as if you had actually sold everything.

The calculation runs as follows:

1. Determine the fair market value of each asset on the expatriation date
2. Subtract the adjusted cost basis (original purchase price plus improvements or adjustments)
3. Total the net unrealized gains across all assets
4. Apply the annual exclusion ($910,000 for 2026) against the total net gain
5. Tax the remaining gains at applicable capital gains rates — typically 15–20%, plus 3.8% Net Investment Income Tax if applicable

The $910,000 exclusion applies to total net unrealized gains — not per asset. Gains across all assets are aggregated and the exclusion applied once, not separately to each position.

Illustrative example: a covered expatriate holds a stock portfolio with $600,000 in unrealized gains, foreign real estate with $400,000 in unrealized gains, and a business interest with $100,000 in unrealized gains: total $1.1 million. After the $910,000 exclusion, $190,000 is taxable at capital gains rates.

This is the standard framework, but it's only the beginning. Not all asset types follow this rule.

Asset-by-asset: how different holdings are actually taxed

This is where most exit tax coverage stops short. The deemed-sale rule applies to most assets, but deferred compensation, retirement accounts, and trust interests each have their own treatment under §877A, and the differences can produce materially different tax outcomes depending on how your wealth is structured.

Capital gains assets: investments, real estate, and business interests

Standard investments, publicly traded stocks and securities, real estate, partnership interests, private company shares: are subject to the standard deemed-sale treatment described above. Gain equals fair market value minus adjusted basis; gains above the exclusion are taxed at capital gains rates.

Foreign real estate is included. Many people assume the exit tax applies only to US-sited assets. It doesn't, the deemed sale covers worldwide property, regardless of where it's located.

Assets with a high cost basis (minimal unrealised gain) have minimal exit tax impact. Assets acquired long ago at a low cost basis, particularly real estate in appreciating markets, or early-stage company shares, are where exposure concentrates.

Deferred compensation

Deferred compensation items, including stock options, deferred salary, and certain bonus arrangements, are treated significantly differently from the deemed-sale rule.

The IRS divides deferred compensation into two categories:

Eligible deferred compensation (where the payor is a US person or certain conditions are met): the covered expatriate can elect to have a 30% withholding tax applied when payments are actually made, rather than being included in the deemed sale. This defers the tax event but eliminates treaty protection; no treaty relief is available for covered expatriates on eligible deferred compensation.

Ineligible deferred compensation (where the payor is not a US person): the present value of the entire account must be included in income on the day before expatriation, a lump-sum inclusion in the year of expatriation, rather than a 30% withholding arrangement. 

The practical implication is significant: someone with unvested stock options, a deferred bonus arrangement, or long-term incentive plans may have a continuing US tax liability that follows them after expatriation and persists until each deferred item pays out — or, for ineligible arrangements, faces a large inclusion in the year of departure regardless of when cash is received. This is one of the most commonly underestimated aspects of the exit tax for executives and founders.

IRAs, 401(k)s, and specified tax-deferred accounts

Retirement accounts receive different treatment again. If a covered expatriate has an interest in a specified tax-deferred account, including IRAs and 401(k)s, the full account balance is treated as distributed and included in income on the day before expatriation. This is not subject to the deemed-sale capital gains treatment, and the 10% early withdrawal penalty does not apply — but ordinary income tax rates do.

The implication: a covered expatriate with a $600,000 IRA faces inclusion of the full balance in gross income in the year of expatriation. Added to other income in the same year, this can push the taxpayer into the highest ordinary income bracket for that year, at rates substantially above long-term capital gains rates.

Roth IRAs are treated similarly in structure, though since contributions were after-tax, only earnings are included. HSA balances are treated as distributed and subject to income tax on the date of expatriation.

Non-US pension arrangements may be subject to different treatment under applicable tax treaties, this is an area that explicitly requires specific professional advice, as treaty analysis is highly fact-specific.

Trust distributions

Distributions from non-grantor trusts to covered expatriates after expatriation are subject to 30% withholding tax. The trust itself may carry reporting obligations.

Additionally, covered expatriates who later make gifts or bequests to US citizens or residents expose those recipients to a Section 2801 tax at the highest estate and gift tax rate, currently 40%, with only a $19,000 annual exclusion for 2026. This post-expatriation consequence extends the financial reach of covered expatriate status well beyond the year of departure.

Cross-border trusts and family trusts with US beneficiaries are among the most complex areas in expatriation planning. If trusts are part of your asset structure, treat this as a mandatory area for specific legal advice rather than general guidance.

Green Card holders: the rules most people miss

The exit tax is not exclusive to citizenship renunciation. It applies equally to long-term permanent residents who relinquish their Green Card, defined as anyone who held a Green Card for at least 8 of the last 15 years before relinquishment.

The same three covered expatriate tests apply. The same deemed-sale calculation applies. The same Form 8854 filing requirement applies. The trigger event is formal relinquishment of the Green Card or an IRS determination that residency has been abandoned.

A frequently missed trap: a Green Card holder who leaves the US informally, stops filing US tax returns, and lets their card lapse without formal relinquishment has not necessarily triggered the exit tax clock, but also has not ended their US tax residency. The IRS continues to treat them as a US tax resident until formal relinquishment occurs, meaning they may be accumulating unfiled return obligations and penalty exposure without realising it.

Green Card holders approaching their eighth year of residency should take specific professional advice before crossing that threshold. Timing the relinquishment before versus after the 8-of-15-year mark can have a decisive impact on whether exit tax exposure arises at all.

• Social Security for US expatriates
• Taxes on American citizens living abroad

Pre-expatriation planning: reducing exit tax exposure

These strategies require professional modelling, they are not DIY steps. But they are the legitimate planning levers available before expatriation.

• Threshold management. For those near the $2 million net worth threshold, reducing net worth through gifts (subject to gift tax rules), charitable contributions, or other transfers before expatriation may move a person below the line. The IRS scrutinises transfers that appear designed solely to avoid covered expatriate status, and any significant changes in assets and liabilities during the five years preceding expatriation must be disclosed on Form 8854 with an explanation.
• Asset sale timing. Selling high-gain assets before expatriation, while still a US tax resident, means paying capital gains tax now at standard rates, rather than having those gains included in the deemed-sale calculation as a covered expatriate. For someone near but not over the net worth threshold, pre-sale can both reduce net worth and lower exit tax exposure on remaining assets.
• Form 8854 compliance. The compliance test is the only trigger entirely within the taxpayer's control. Five years of complete, accurate US tax filing before expatriation eliminates it. Begin this review early; catching up through Streamlined Procedures takes time, and the compliance history must be in order before the renunciation appointment, not after.
• Expatriation date timing. The $910,000 exclusion adjusts annually for inflation. In some circumstances, expatriating in a later calendar year, when a higher exclusion applies, can reduce taxable gains modestly. The expatriation date is the date of the legal event (oath of renunciation, formal Green Card relinquishment), not the Form 8854 filing date.

Frequently asked questions

What is the current cost to renounce US citizenship? 

Effective April 13, 2026, the State Department fee dropped to $450, down from $2,350 previously. Verify this is current before making plans around it. 

Does the exit tax apply to gifts I make to US citizens after expatriating? 

Yes. Covered expatriates who make gifts or leave bequests to US citizens or residents after expatriation expose those recipients to a Section 2801 tax at 40%, with only a $19,000 annual exclusion for 2026. This is a lesser-known but significant post-expatriation consequence that can affect estate planning for years after the expatriation date.

Can I defer paying the exit tax if I can't afford it immediately? 

Yes, covered expatriates can elect to defer payment on specific assets until actual sale, by entering into an irrevocable tax deferral agreement with the IRS, posting adequate security such as a bond, and paying interest on the deferred amount. The election is made on Form 8854 and cannot be reversed.

Does dual citizenship change the exit tax calculation? 

Generally no,  if you renounce US citizenship, the exit tax analysis applies regardless of what other citizenship you hold. The narrow dual-citizen exception applies only to those who were dual citizens from birth, remain taxed as residents of the other country, and were US residents for no more than 10 of the last 15 years, and still requires Form 8854 filing and compliance certification.

Can expatriation be undone if the tax bill is larger than expected? 

No. Renunciation of US citizenship is permanent and irrevocable. This is why pre-expatriation modelling with a qualified CPA matters far more than any other financial decision in the process.

What happens if I simply don't file Form 8854? 

Without Form 8854, the IRS continues to treat you as a US person, subject to worldwide taxation and all filing requirements. You automatically become a covered expatriate, face a $10,000 penalty per form, and your US tax residency never formally closes.

The bottom line

The exit tax is not the unavoidable penalty it's often portrayed as. Most Americans who renounce citizenship are not covered expatriates and will not owe it. For those who are, or who are approaching the thresholds, the calculation is manageable with adequate planning, but it requires specific professional advice rather than general guidance. 

The asset-by-asset differences between capital gains, deferred compensation, retirement accounts, and trusts can produce dramatically different outcomes depending on how wealth is structured, and the decisions made before the expatriation date cannot be reversed after it.

If you're weighing citizenship renunciation, start with our companion guide on the broader legal and financial implications: Renouncing US citizenship: tax implications, exit tax & what to expect

For personalized guidance on your specific situation, SavvyNomad's CPA-access service connects you with cross-border tax professionals familiar with expatriation planning.