The Tax Consequences of Renouncing US Citizenship

Renouncing US citizenship is a life-changing decision that comes with both significant responsibilities and potential rewards. 

For those considering this bold move, understanding the consequences is vital before officially breaking up with Uncle Sam. 

From final tax obligations to the infamous expatriation tax, the financial side of giving up your citizenship can be both complex and weighty.

Your final tax liability is determined by the value of your assets the day before you expatriate, as if you were paying a death tax to the US government before they allowed you to move on. 

So, the night before the impending ‘death’ of your US citizenship, you must ensure you have an accurate picture of the value of your assets. 

This is the ideal scenario, but when most people consider renunciation, they don’t fully understand the tax consequences attached to their decision. 

That is precisely why we need to talk about it and this in-depth guide examines the tax consequences of deciding to renounce your US citizenship.

If you want to learn more about how to renounce US citizenship and how the process works, you can read about it here. 

Cost of Renouncing US Citizenship

For many people, renouncing their US citizenship is a costly endeavour. 

For one thing, giving up one citizenship requires having a second passport, and second citizenships are not usually cheap things to come by. 

Obtaining citizenship by descent can take a lot of time, with plenty of headaches and costs.

Citizenship by naturalisation can take even more time and can create additional tax obligations. 

Citizenship by investment naturally requires a cash outlay, usually in the magnitude of six or seven figures. 

But, even if you were blessed with dual citizenship from birth and enjoy the benefits of having a second passport at no cost to you, there is another cost that prohibits many people from renouncing: The renunciation fee. 

Based on claims that the surge in renunciations following the introduction of the Foreign Account Tax Compliance Act (FATCA) increased paperwork and other operational costs for the US State Department, the government felt justified in introducing a fee for anyone who wished to renounce their citizenship. 

It’s important to note that most countries do not charge you anything if you choose to claim your right to renounce your citizenship, which puts the absurdity of the fee into perspective.

And, in the countries that do charge a fee, it is rarely more than US$100. However, in 2010 (yes, right after the introduction of FATCA), the US government began charging a US$450 fee.

Four years later, it raised the fee by an astounding 422% to US$2,350 – the highest fee of its kind in the world and way more than any other high-income country.  

Apparently, the taxes you’ve been paying into the system for years are not enough to cover a little paperwork to officially let you leave. 

Instead, you must pay in cash at the time of your renunciation (although the various embassies do it differently). 

And, for some people, the fee can be prohibitive. There are literally some people who cannot afford to renounce. That, in and of itself, is a tax.

The US Citizen Exit Tax 

So, apart from paying the excessive fee, there is also a possibility that you will be subject to a mark-to-market exit tax on all of your assets. 

It’s important to clarify, though, that not everyone who renounces must pay the exit tax. 

You are only subject to the exit tax if you are considered a covered expatriate. 

There are three situations that will deem you a covered expatriate and trigger the exit tax: 

• Your net worth is at least US$2 million or more
• You have had an average federal tax liability (liability, not salary) of roughly US$206,000 in 2025 over the five years prior to renouncing (this figure is adjusted each year for inflation)
• You cannot certify tax compliance. 

If you meet any one of these tests, you are considered a covered expatriate and must pay the exit tax. 

If you do not meet them, you are free from all exit tax obligations. 

However, you will still need to do the paperwork to prove that you do not meet any of the three tests. 

While the first test depends on the value of your assets, as if you sold them the day before you renounced, it is important to know whether or not you are a covered expatriate long before you renounce so you can address the situation if needed.

Let’s examine each test to understand exactly how you might trigger the tax and how you can avoid doing so, if possible.

Test #1: Net Worth of Over US$2 Million

This first test is not about assets alone but your assets minus your liabilities – your net worth.

There are, of course, various components that factor into your net worth, and calculating each one can vary in complexity.

A business, for example, is often the biggest asset of the people we work with at Nomad Capitalist. It also happens to be one of the more complicated assets to know the value of, as if it were sold the day before the owner renounced. 

So many considerations go into valuing a business, and some people can get into trouble here. 

What is a company truly worth? What is an internet-based company worth? If you own a consulting company, does that have any value? 

Some businesses may have zero or next-to-zero value because they are entirely based on your time and effort, and you could always quit. 

There’s a whole process to figuring out the worth of your business and how it counts toward your overall assets. It is not just the value of the business itself.

For instance, your company could be a cash cow that produces a lot of cash that you park in your company overseas. Or your company could have an inherent enterprise value. 

While you can save a lot of money by renouncing your US citizenship and going overseas, if your business is worth a lot, it may also cost you a considerable amount to leave. 

However, if you have a company that could reach that US$2 million limit sometime in the near future, it may be better to invest in economic citizenship and renounce now rather than risk triggering the exit tax. 

Cash is another asset that is factored into your net worth. Unlike a business, cash is easy to value. It is also very unlikely that you will owe much if any, capital gains tax on your cash holdings. 

Cryptocurrencies are also relatively easy to value. Some people would argue that crypto should not factor into this calculation, but we wouldn’t suggest risking it. 

It’s better to be transparent and report everything upfront to make a clean break than to live with the worry hanging over you. You don’t want the IRS to come back and nail you later for failing to disclose your crypto holdings. 

Real estate in the US and other developed countries is pretty easy to value as well, while getting a valuation in emerging economies may be more difficult. The bigger challenge with real estate is that the IRS determines the valuation of the property. 

If you paid US$500,000 for a home that is now worth US$1 million, but the IRS says it’s worth US$1.2 million, you’ll either have to go along with their calculation or provide evidence that it’s worth the lower amount.

And, even if you do not sell the home before you leave, you will have to pay as if you did. 

So, while you invested US$500,000, the IRS will treat you as if you have US$1.2 million in your pocket and a total of US$700,000 in capital gains. (It should be noted that you do get an exemption if it is your personal residence.) 

Stock is another easy asset to value. Basically, everything you own is thrown into the exit tax. 

Ultimately, you will need professional help to crunch the final numbers. Just be sure to know the final figure well in advance of your renunciation date, or you may end up paying a larger tax bill than you expected.

Test #2: High Average Tax Liability

It is much less common to meet this second test than the other two.  

As of 2025, you would have to make considerable money to pay an average of US$206,000 in taxes each year, especially if you’re an entrepreneur living overseas. 

You’d have to have a pretty big company and be paying yourself a very high salary to qualify. 

For most entrepreneurs, the bigger test is knowing whether or not you have US$2 million in assets. 

Whatever your situation, if you are paying an average of just over US$200,000 or more a year in taxes, you will be considered a covered expatriate and trigger the exit tax. 

With that kind of tax burden, you may not care about the exit tax and may simply want to renounce and move overseas right away. 

However, before you jump ship, we have just one suggestion: if you have never lived overseas before, give it a try before you decide to renounce. 

There are offshore strategies available to legally reduce your taxes without considering renunciation. 

If those solutions do not work, you can go from there but travel first to see if you enjoy the lifestyle and then make your decision.

Test #3: Tax Compliance

This is possibly the principal way people trigger the exit tax by failing to follow US tax laws. 

This isn’t necessarily because they are trying to evade taxes but because they have never called the US home, never viewed themselves as American and were not aware they had to file taxes. 

If you can’t prove tax compliance for the past five years, you will be considered a covered expatriate and will be subject to the exit tax. 

Nomad Capitalist has worked with a tax advisor helping Dutch citizens who were born in the US. 

There were various reasons for this, such as their parents vacationing or living in the US temporarily – and by virtue of being born in the United States, they became US citizens. 

Some of them managed to get into their 20s, 30s and even 40s before finding out they were ‘accidental Americans’ and having to file years of back tax returns. 

The good news is that, at the time, they could still file those returns, claim that they didn’t mean to do any harm, then renounce and just be Dutch. 

Another common issue we see involves Canadians with a parent who’s American. 

By virtue of their parentage, they became US citizens either because their birth was registered in Canada at the US Embassy or because they were born in the US and then moved or went back to Canada. 

They, too, may have been unaware of their US citizenship responsibilities (read, tax obligations) and must be in compliance before renouncing or being subject to the exit tax. 

Then, there are the US people who have been living overseas, assuming that they didn’t need to pay taxes. If this were you, you could use the streamlined filing compliance procedures to get back on track and avoid triggering the exit tax. 

The bottom line? Don’t think you can get away with anything less than compliance. 

If you’re living overseas, make sure to file all the proper forms. People who have offshore bank accounts need to file the FBAR. If you live overseas, you still have to file. 

If you don’t file your taxes, it’s going to come back to bite you in one way or another. 

If you never want to deal with US taxes again, you have to face them now and certify your tax compliance in the past, whether you’ve been living overseas or in the US. 

And, if you’re living overseas, don’t think you’re above the law or assume that you’ll never go back because there may come a time when, even if you don’t want to go back, you’ll want to renounce your citizenship. Unless you’re compliant, you’re going to have problems. 

So, file your taxes. Be legal.

Strategies to Avoid Being a Covered Expatriate

There are several strategies to avoid paying the exit tax, from gifting money to becoming tax-compliant.

If you assess your situation well before you renounce, it is possible to remediate it so you no longer qualify as a covered expatriate by the time you renounce.

 However, it is much easier to fix some situations than others. 

For instance, it is practically impossible to go back and undo your past earnings and average tax payments. 

You may be able to reduce the average by waiting longer to renounce while earning less, but you will have to weigh the costs and benefits involved with that decision. 

It is also rather difficult to undo your net worth, although there are some gifting strategies that people use to reduce their net worth. 

One option would be to use your money to buy a second passport that allows you to renounce. At Nomad Capitalist, we see a second passport as an investment – it works to reduce your net worth. 

There are complicated solutions for reducing your net worth, but other strategies could be as simple as giving some money to charity before you renounce. 

The last test is the most straightforward to avoid because you can always return and become tax-compliant.  

If you’re not in tax compliance and you’re thinking of renouncing US citizenship, get tax compliant first. 

This test should never be an issue in the end.

It May Be Worth It Anyway

It’s our belief that for a lot of folks – especially those involved in fast-growing businesses and investments like cryptocurrencies – it may be better just to pay the exit tax and be done.

Rather than wasting your time on different strategies to avoid becoming a covered expatriate, don’t worry about it. Pay the exit tax and then enjoy the freedom from there on out. 

The whole issue of renouncing US citizenship and taxes related to the process is likely minor in comparison to the long-term benefits.

Plus, the US exit tax and the total cost of renouncing US citizenship could get worse every year. 

After Eduardo Saverin, of Facebook fame, renounced to become a citizen of Singapore, Congress considered raising the capital gains tax to 30%. 

So, the US government could change the exit tax rules or any of the conditions for renouncing at any point in the future. 

While you may take a hit now, you may still benefit in the long run by renouncing and paying the exit tax now.

In Eduardo Saverin’s case, though he still had to pay a lot of tax when he renounced his US citizenship, at least he did so before Facebook totally went public. 

Some experts put his savings at US$700 million just a short time after he renounced. 

So, paying an exit tax may not be the end of the world for you. That is up to you to determine, preferably with some professional help.

Past Taxes

During the renunciation process, you will undergo a couple of interviews. At some point in those interviews, the embassy official will directly ask you, under oath, whether or not you are renouncing in order to escape any taxes or military service.  

As we know, there is no way to escape past taxes or the legal issues surrounding the failure to pay them. You can still be charged with crimes and hauled in by the IRS. 

This means you will still need to meet financial responsibilities such as child support payments, and your past tax debts certainly do not go away. 

You can stop incurring new tax debts once you renounce, but whatever has already happened doesn’t just get wiped away.

Everyone needs to get compliant before renouncing, which often involves paying past tax debts. 

While you should pay those past taxes whether or not you are planning to renounce, they are an unavoidable expense that comes with renouncing. 

Basically, there is no way out of the US tax system without paying your past dues.

Estate Tax

Even if you renounce, if you own property in the US, it’s only a matter of time before you’ll have to deal with the estate tax.

There are both costs and benefits to renouncing when it comes to the actual US death tax. The estate tax is a tax on the transfer of your property at death – the final ‘exit tax’ per se. 

The federal estate tax applies to property owned by a US citizen wherever they may own it, which means that your worldwide assets are subject to estate tax rates of up to 40% at the time of your death. 

Renouncing shields your non-US assets from this estate tax exposure. That’s the benefit. However, the estate tax also applies to US property owned by non-US citizens. 

So, if you maintain property in the US – real estate, stocks – it will still be subject to US estate tax rates at the time of your death. 

If you renounce, you will lose the advantages that only US citizens have in shielding that property from the estate tax. 

Currently, US citizens can shield up to US$11.2 million in property from the estate tax, while non-US citizens can only shield a measly US$60,000. That’s the cost. 

If you plan to maintain properties in the US, the death tax will deliver a heavy blow at the time of your passing. 

However, if you renounce, sell your properties in the US, and move to one of the many countries with no estate taxes, you can completely avoid the burden of a death tax. 

However, note that this particular strategy will require high levels of professional planning to be successful.

Gift Tax

There are also costs and benefits to renouncing when it comes to US gift tax laws. 

The good news is that the Trump tax reform doubled the federal estate and gift tax limit to US$11.2 million per US citizen. 

This means that you can gift a large amount of your wealth to significantly reduce your net worth and get below the US exit tax threshold. 

However, special rules apply when a covered expatriate gifts property. If you make a large gift before you expatriate but in the same year that you renounce, you will pay a significant gift tax because the unified credit will not apply to you.

 It is better to make your big gifts at least one tax year before you plan to expatriate. 

Additionally, once you renounce, your gifting strategies may be limited. For instance, as a US citizen, you can make unlimited tax-free gifts to a spouse who is also a US citizen. 

If one spouse remains a US citizen and wishes to gift money to their non-US spouse, they will only be allowed a small annual exclusion of US$185,000 before becoming subject to the 40% gift tax. 

Although there’s no gift tax due when you give assets to your spouse, you still have to declare assets given away worth over US$18,000.

Final Reporting Obligations

After you have taken the oath of renunciation, while you are no longer considered a US citizen, you still have two final reporting obligations.

If you fail to file these final reports, you have not fully expatriated for tax purposes. These are: 

Dual Status Income Tax Return

First, you must file one final US tax return for the year in which you renounced. Because you will be considered a US citizen for part of the year and a non-US citizen for the other part, this return will be considered a ‘dual status’ return. 

A dual status return simply means that you will be taxed as a US citizen for the part of the year in which you were still a US citizen and as a non-resident alien for the time following your renunciation. 

Form 8854

With your income tax return, you must also file Form 8854. This is the form used to declare all of your assets and make any applicable exit tax payments. 

Until you file this form, you may remain subject to US tax. The exact date when you expatriate (renounce US citizenship or a long-term residence) will determine which parts of the form you must complete. You can learn more about those terms here. 

The biggest change in recent years is that you used to have to file returns for several years following your renunciation. 

Now, you only have to file one final tax return and pay the renunciation fee and possibly the exit tax, and you’re done. 

The Tax Consequences of Renouncing US Citizenship: FAQs

Need Help with US Citizenship Renunciation Tax Planning?

As simple as the process of renouncing US citizenship may be, the actual tax consequences can be greater than most people anticipate. 

If you plan to renounce, you need to ensure that you are tax-compliant before you move forward. 

If possible, you should also take measures to avoid becoming a covered expatriate under the other two tests.

This can be complicated and will likely require outside help. And, in some circumstances, you may actually increase your US tax burden by renouncing. 

You need a real strategy. You need proper guidance from someone who has experience with renunciation. Your local tax guy isn’t going to cut it. 

You need someone who has experience with the forms, the process and the potential tax consequences.

At Nomad Capitalist, this is exactly what we do for high-net-worth individuals just like you. If you want help, please reach out.