How the US Exit Tax Works: A Guide for Those Renouncing US Citizenship in 2025

More Americans than ever are planning to leave the United States, and its wealthiest citizens are leading the charge.

Immigration enquiries surged after Donald Trump’s 2024 re-election and the numbers have been climbing steadily ever since.

Some US citizens are unsettled by the incoming administration’s economic agenda, while many others are simply weary of the sharp political division and social unrest.

That’s on top of the sizeable group of citizens who are simply fed up with the burden of the US tax system and who want a clean break from the US and a fresh start on their own terms.

For high-net-worth individuals (HNWIs), Plan B is no longer a luxury – it’s a necessity. Whether actually relocating or simply laying the groundwork, an increasing number of wealthy Americans are preparing to move their lives – lock, stocks and assets – offshore.

Many are realising that the only way to fully escape the IRS and move beyond the reach of FATCA regulations involves one final step: renouncing US citizenship.

After all, it’s the only way to stop filing and paying taxes on global income.

But renouncing isn’t simple. To avoid becoming stateless, you’ll need to line up second citizenship first, and without proper planning, you could face a steep exit tax.

Handled strategically, the financial penalties can be minimised – or even avoided – but timing is critical. If you’re uneasy about where the US is heading, now is the time to prepare your exit – not when it’s too late.

That’s just one of the reasons people choose Nomad Capitalist – we have direct experience across multiple jurisdictions and will help you weigh up the pros and cons of each. 

So, remove all the guesswork, skip past the gatekeepers and speed up the entire process by reaching out and letting us help you go where you’re treated best.

Renouncing Your US Citizenship

You don’t need to renounce US citizenship to leave the US or become a citizen of another country. The US permits dual citizenship, and many Americans retain their US citizenship while living and working overseas. 

This allows them to retain all the benefits of being a US citizen but with the tax reporting obligations of US citizenship. Renouncing your US citizenship involves surrendering your US passport and the benefits of being a US citizen.

It’s an irreversible decision that brings a fair amount of paperwork, a renunciation fee of US$2,350 and potentially a sizeable expatriation tax bill.

You’ll finalise your renunciation in an overseas US consulate or embassy, after which you’ll likely need to make visa arrangements to return to the United States. 

Nomad Capitalist’s complete guide explains each of the steps required along the road to renouncing US citizenship.

But what’s at stake?

Renouncing Your US Citizenship: Pros and Cons 

There’s a fair bit to weigh up when choosing to hand in your US passport. The advantages include: 

• You are no longer required to file and pay taxes as a US citizen
• Reducing the filing burden that US citizens face
• No longer having to file a US tax return, fill out Form 5471 for foreign companies
• No longer having to report foreign bank accounts with the FBAR form
• Broadening your banking options by escaping FATCA reporting obligations
• Not having to deal with any new tax laws the US may implement in the future.

If you need to decide if the pros outweigh the cons, we’ve dedicated a whole article to the topic here. Some negatives of renouncing are:

• Surrendering your US passport
• Difficulties entering the United States and remaining there for a long time
• Not being able to access the US job market
• Foregoing strong consular protections from the US
• Being liable to an exit tax on the deemed disposal of your assets.

What is an Exit Tax?

An exit tax is a one-off tax on unrealised capital gains imposed on those permanently leaving a country where they’re a tax resident. 

Basically, it’s a final government grab at everything you have left in your country before leaving for good. It’s the last tax you must pay to exit the tax system and become a tax resident elsewhere.

Who Pays Exit Tax?

The regulations for who pays exit tax and how it’s calculated depend on the country. Some nations don’t charge an exit tax at all. 

In the US, an exit tax is charged on those renouncing citizenship (or permanent residency if a long-term Green Card holder), although only if you meet the definition of a ‘covered expatriate’.

A covered expatriate is someone renouncing their US citizenship that meets at least one of the following criteria. 

• A net worth of at least US$2 million
• An average annual net US income tax of more than US$206,000 in 2025, adjusted for inflation each year in the previous five years
• Has failed to certify compliance with all US federal tax obligations over the past five years.

You’ll confirm these criteria by filing Form 8854 as part of your final tax return for the year of expatriation. 

This form is used to certify compliance with US federal tax obligations and to confirm details of your net worth and past income taxes. 

If you meet the definition of a covered expatriate, you’ll also use this form when you calculate your exit tax bill. 

Your bill should be paid alongside any other taxes owed for your final tax year as a US citizen. 

Exit Tax Exceptions

Dual citizens can avoid being defined as covered expatriates provided: 

• They became a US citizen and a citizen of another country at birth and continue to be a citizen and tax resident of that country 
• They were not a US resident for more than 10 of the past 15 years preceding their expatriation. 

Minors can avoid a covered expatriate status provided:

• They expatriated before they were 18-and-a-half years old
• They were a US resident for no more than 10 years before expatriating. 

How Much is the Exit Tax in the US?

It’s complicated to calculate your exit tax since it’s based on how much you would be charged if you sold all of your assets at fair market value on the day before your expatriation. 

The calculation takes into consideration your:

• Deemed dispositions
• Specified tax-deferred accounts
• Eligible deferred compensation
• Ineligible deferred compensation
• Non-grantor trusts.

No gains or income that have already been taxed by the IRS will be subject to exit tax.

Your unrealised capital gains are taxed based on normal capital gains tax rates in the United States. For most taxable assets, it’s easy to calculate these gains based on the purchase price and its official value on the day before your expatriation. 

However, for tax purposes, assets like antiques or unique collectables may require professional appraisals. The top rate of CGT is 23.8%, and most people who qualify as covered expatriates are likely to pay this. 

Note that this rate includes the Net Investment Income Tax (NIIT), and the base long-term capital gains tax rate is 20%. The additional 3.8% NIIT applies to certain high-income individuals.

Funds from specific tax-deferred accounts, such as an IRA or Roth IRA, are taxed as if they were received as income on the day before your expatriation. 

A HSA 529 Plan, Coverdell Education Savings Account and certain medical Savings Accounts are other examples of tax-deferred accounts which are subject to US exit tax. 

You can arrange for funds from specific accounts to be defined as eligible deferred compensation, so tax is deducted at source on future withdrawals. 

These accounts include 401(K), 403(B), 457, SEP, Simplified Retirement Accounts and Restricted Stock Units. You’ll make these arrangements by filing form W8-CE to the payor of the deferred compensation within 30 days of expatriation.

If you don’t do this, the funds in these accounts are defined as ineligible deferred compensation and will contribute to your exit tax bill. Meanwhile, all funds from non-grantor trusts are deducted at source on future withdrawals by default.

There is a significant exclusion amount of US$890,000 in 2025, so you’ll only be taxed on unrealised gains above this figure. 

Form 8854 provides a structured way to calculate whether you qualify as a covered expatriate and how much you owe for your exit tax. You’ll be expected to pay this as part of your final tax return as a US citizen. 

What Are Unrealised Gains?

In figuring out your exit tax obligation, the idea of unrealised gains can get pretty confusing. So, let’s lay it out simply.

Unrealised gains are the increase in value of an asset that has not yet been sold. These gains exist only on paper and are not subject to taxation until the asset is sold. They apply to investments like stocks, real estate, or other assets that have appreciated in value but remain unsold.

So, your US exit tax is based on unrealised or ‘paper’ gains, not on actual capital reflected in your bank account. 

While this makes it complicated to figure out exit taxes, it also opens up options to reduce this tax bill.

How to Avoid US Exit Tax

Thankfully, with some careful preparation, steps can be taken to reduce your US exit tax bill or to mitigate your liability entirely. 

You can restructure your assets so that you fall below the net worth threshold that classifies you as a covered expatriate. 

Gifting your assets to a spouse, your children or a trust could help lower your net worth below the US$2 million threshold. 

At the very least, it could reduce the value of your deemed dispositions as a covered expatriate. 

It helps to plan ahead if you’re taking this route, though, because the US has an annual limit of US$19,000 per person per year on tax-free gifting. 

Indeed, any donations that exceed this limit will be subject to gift tax.

But, more crucially, any assets given away in your final year as a US citizen are still considered when calculating exit tax. 

So, you’ll need to wait an additional year after giving your assets away before expatriating if you want these donated assets to be subtracted from your exit tax calculations. 

If your income is inconsistent, you could consider timing your renunciation so that your average US income tax bill for the previous five years falls below US$206,000. 

That would shed you of your covered expatriate status. Although, this strategy is only likely to be feasible if your annual income is lower now than in previous years. 

Of course, you have the option to sell your assets before renouncing to reduce your net worth or lower your exit tax bill. 

You could benefit from a lower capital gains tax rate on these sales, especially if you fall into a lower tax bracket during the year that you sell. 

These strategies are only likely to help you shed your covered expatriate status if you currently sit close to the financial thresholds. 

If you want to leave the United States now, you may choose to retain your US citizenship or even embrace dual citizenship for some time until you’re ready to renounce. 

Indeed, most US citizens wait until they have a second passport before renouncing US citizenship to avoid becoming stateless.

Want to learn how we help high-net-worth individuals to legally lower their taxes and pursue citizenship in exciting new countries? Discover more about our holistic Nomad Capitalist plans here. 

Renouncing US Citizenship and Exit Tax: FAQs

Planning Your Perfect Plan B?

The notable exodus of high-net-worth individuals from the US is a clear sign that successful people are no longer willing to accept the US government’s unbending terms. 

US citizens are realising they have options overseas and are prepared to action those same options.

You may not yet be among them, ready to completely abandon US citizenship yet. That’s understandable, particularly if you need time to get your affairs in order. 

Even so, the best time to start planning is now, whether as an option to use now or have in your back pocket for later. You’ll need another citizenship in place before you can complete your renunciation, and it’s never too soon to start exploring what’s on offer. 

It’s, after all, the first step in taking control of your future and worldwide assets. 

But it’s also a complex area of tax and citizenship law. Trying to understand international laws, tax regulations and investment options can feel like a full-time job. 

The truth is that the most successful Plan Bs are built with experienced planners and that’s where we come in. 

At Nomad Capitalist, we specialise in helping individuals like you create and implement personalised strategies. If you’re ready to renounce now or explore your options, we’re here to help.