The Final Toll: Mastering the Expatriation Tax
The Final Toll: Mastering the Expatriation Tax
Renouncing US citizenship is a taxable event. How to navigate the “Mark-to-Market” exit tax without losing 23.8% of your global wealth.
Executive Summary
- Covered Expatriate: If your net worth exceeds $2M OR your average annual income tax is ~$200k+, you are a “Covered Expatriate.” You cannot just leave; you must pay the toll.
- Mark-to-Market Rule: The IRS treats you as if you sold all your worldwide assets on the day before expatriation. You owe Capital Gains Tax (23.8%) on the unrealized gains.
- The “Forever” Taint: Being a Covered Expatriate is a permanent stain. Any gift or bequest you leave to a US citizen (e.g., your children in the US) is taxed at 40% under IRC § 2801.
The Dual Citizen Exception
There is a narrow escape hatch. If you were a dual citizen at birth and have not lived in the US for more than 10 of the last 15 years, you might be exempt from the Exit Tax even if your net worth is over $2M. (Strict rules apply).
Mechanic: The Exit Calculation
$2M
Net Worth Limit
Deemed Sale
Phantom Tax Event
Form 8854
Mandatory Filing
Sec. 2801
Heir Tax Risk
Simulation: To Leave or Stay? ($10M Portfolio)
Long-Term Wealth Preservation (20 Years)
| Asset Type | Exit Tax Treatment | Planning Strategy |
|---|---|---|
| Stocks / Real Estate | Deemed Sold (Capital Gains) | Gift to Spouse / Charity |
| 401k / IRA | Deemed Distributed (Income) | Roth Conversion (Pre-Exit) |
| Grantor Trusts | Assets Included in Net Worth | Terminate / Decant Trust |
“The Exit Tax is the cover charge for freedom. It’s painful, but paying it once is often cheaper than paying US taxes forever.”
Essential Resources
INTERNAL
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