Expatriation Tax: The Price of Freedom (Renouncing US Citizenship)
Tax Tips / Global Planning
Expatriation Tax: The Price of Freedom (Renouncing US Citizenship)
💡 Executive Summary
- Problem: The US is one of the only countries that taxes based on Citizenship, not Residency. Living in Dubai or Monaco does not stop the IRS.
- Solution: Renounce US Citizenship (or abandon a long-term Green Card).
- Result: If you are a “Covered Expatriate” (Net Worth > $2M), you must pay an “Exit Tax.” The IRS treats you as if you sold ALL your worldwide assets the day before you left.
⚠️ THE “covered EXPATRIATE” TRAP
You are “Covered” (and taxed) if you meet ANY of these:
1. Net Worth > $2M (includes worldwide assets).
2. Average Annual Income Tax > ~$200k (last 5 years).
3. Failure to certify 5 years of tax compliance (Form 8854).
If you are Covered, you pay the Exit Tax. If not, you can leave for free.
You are “Covered” (and taxed) if you meet ANY of these:
1. Net Worth > $2M (includes worldwide assets).
2. Average Annual Income Tax > ~$200k (last 5 years).
3. Failure to certify 5 years of tax compliance (Form 8854).
If you are Covered, you pay the Exit Tax. If not, you can leave for free.
Renouncing citizenship is the nuclear option. It is expensive, irreversible, and politically sensitive. However, for Ultra-HNW individuals facing a 40% US Estate Tax on worldwide assets, paying a one-time Exit Tax (23.8% Capital Gains) to secure permanent freedom for future generations is often a mathematically superior trade.
🧐 Core Mechanic: Mark-to-Market Deemed Sale
The IRS pretends you sold everything you own (Stocks, Real Estate, Crypto, Private Business) at Fair Market Value on the day before expatriation. You pay Capital Gains Tax on the “phantom profit” above a roughly $850k exclusion allowance.
The IRS pretends you sold everything you own (Stocks, Real Estate, Crypto, Private Business) at Fair Market Value on the day before expatriation. You pay Capital Gains Tax on the “phantom profit” above a roughly $850k exclusion allowance.
Performance Simulation: The Break-Even Analysis
Wealth Trajectory ($50M Net Worth)
Stay in US (Tax Drag + Estate Tax)
$28M Final Value (After Death)
Slow Bleed
Renounce (Pay Exit Tax, Move to 0% Tax)
$41M Final Value*
Pain Now, Gain Forever
Pre-Exit Planning: Reducing the Blow
| Strategy | Mechanism | Goal |
|---|---|---|
| Gifting (SLAT/Dynasty) | Remove assets from personal name | Drop Net Worth < $2M |
| Valuation Discounts | Place assets in FLP (Art. 615) | Lower “Deemed Sale” Value |
| Puerto Rico (Act 60) | Move to PR instead of Renouncing | “Soft Exit” (Keep Passport) |
“The Exit Tax is the toll booth at the border of financial freedom. It is steep, but once you cross it, you and your descendants are citizens of the world, answering to no tax authority but your own choice.”
🔗 Related BMT Playbooks (Internal)
🛡️ The Lite Version: Puerto Rico Act 60 (0% Tax without Renouncing) ⚖️ The Tool: FLP (Use discounts to lower Exit Tax basis) ✅ The Destination: Moving assets to a Foreign Grantor Trust🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 877A (Tax Responsibilities of Expatriation) 🏛️ IRS Official: Expatriation Tax Guide 📘 State Dept: Legal Process of Renunciation
BMT designs for tax reality, not theory.