The US Exit Tax: How to Renounce Citizenship Without Losing 23.8% of Your Wealth
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Result: Gifting to a US spouse dropped Net Worth below $2M, saving $150k.
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The US Exit Tax: How to Renounce Citizenship Without Losing 23.8% of Your Wealth
CORE INSIGHTS
- The Trap: If your Net Worth > $2M or Avg Tax Liability > $201k, you are a “Covered Expatriate.” The IRS treats your exit as a sale of ALL assets.
- The Strategy: You must lower your net worth below the $2M threshold BEFORE expatriation. Gifting to a US spouse or charity is the standard move.
- The Exception: “Dual Citizens at Birth” may be exempt from the Net Worth test if they meet strict residency requirements. This is a rare “Get Out of Jail Free” card.
Expatriation is the ultimate divorce from the IRS. But like any divorce, it’s expensive. The Exit Tax confiscates ~24% of your unrealized gains unless you engineer your balance sheet first.
The “Mark-to-Market” Calculation
- Total Gain: $X (e.g., $2M Gain).
- Exclusion: ~$866,000 (2025 Est.).
- Taxable: $X – Exclusion.
- Tax Due: Taxable × 23.8%.
*Deferred Compensation (IRA) is taxed at Ordinary Rates (up to 37%).
What-If Scenario: $3M Net Worth ($1.5M Gain)
| Action | Covered Expat? | Tax Bill |
|---|---|---|
| Renounce Now | Yes (NW > $2M) | $150,892 |
| Gift $1.1M First | No (NW = $1.9M) | $0 |
Visualizing the $2M Cliff
*Figure 1: Tax Liability. Crossing the $2M threshold triggers tax on ALL gains (minus exclusion).*
Strategic Action Steps
1
Audit Net Worth
Include global assets, pensions, and beneficial trusts. If you are at $2.1M, you are in the danger zone.
Include global assets, pensions, and beneficial trusts. If you are at $2.1M, you are in the danger zone.
2
The “Gifting” Maneuver
Gift assets to a US spouse (unlimited) or US child (lifetime exemption) to lower your personal balance sheet below $2M.
Gift assets to a US spouse (unlimited) or US child (lifetime exemption) to lower your personal balance sheet below $2M.
3
File Form 8854
You must certify 5 years of tax compliance. If you missed a year, you are Covered automatically. Fix past returns first!
You must certify 5 years of tax compliance. If you missed a year, you are Covered automatically. Fix past returns first!
The Bottom Line: Who Should Choose What?
- Do This: Planning to live abroad permanently with a second passport. Consult an attorney 2 years early.
- Avoid This: “Quietly” leaving. You remain a US taxpayer. The IRS can pursue you globally.
Frequently Asked Questions
What triggers the US Exit Tax?
1) Net Worth > $2M, 2) Avg Tax Liability > ~$201k, or 3) Failure to certify 5 years of tax compliance.
How is the Exit Tax calculated?
It acts as a deemed sale of all assets. You owe Capital Gains Tax (23.8%) on gains above the ~$866k exclusion.
Does the Dual Citizen Exception really work?
Yes. If dual citizen at birth and resident of the other country, you may be exempt from the Net Worth test.
Disclaimer: Expatriation tax law (IRC 877A) is complex. Mistakes are irreversible. Mandatory legal counsel required.
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