In the midst of a heated election season in the United States, it is not uncommon to hear voters from both sides of the aisle proclaim that they will leave the United States if their party loses. After the elections are over, few members of the defeated political party tend to follow through on their promise, but the number seems to increase every cycle. According to the U.S. Treasury Department, 635 individuals expatriated from the United States in the final quarter of 2024. Note that this number includes both individuals who renounced their citizenship as well as individuals who relinquish long-term permanent residency–individuals in both categories are subject to the expatriation tax under Section 877A of the Code.

Given the increasing trend of many Americans seeking greener pastures elsewhere, it’s worthwhile to quickly review the rules for the exit tax that might apply to such expatriations. These rules are relevant not only to Americans considering leaving the United States, but also to the many U.S. citizens who already live overseas but choose to retain the benefits of their citizenship notwithstanding the ongoing cost of being subject to worldwide U.S. taxation. In some cases, U.S. citizens can easily mitigate these costs by way of the foreign-earned income exclusion pursuant to Section 911 of the Code. However, other U.S. citizens who rely on unearned investment income receive no benefit from this exclusion. Increasingly, U.S. citizens with large holdings in public securities or cryptocurrency are evaluating their options for minimizing their tax exposure upon disposition and realizing gain.

How does expatriation work?

A U.S. citizen who plans to expatriate should follow these steps:

• First, the U.S. citizen should review the IRS Form 8854, “Initial and Annual Expatriation Statement”, to ensure that they can fully complete it and swear to the necessary statements under the penalty of perjury. Completing the form will require a full review of the taxpayer’s financial system and tax compliance history, and thus taxpayers with more complicated situations should consider consulting a qualified attorney for assistance.
• Second, the U.S. citizen should schedule an appointment at a U.S. embassy or consulate. It’s usually better to schedule the appointment as early in the year as possible, prior to the tax filing deadline. The expatriation will not be treated as final until a certificate of loss of nationality (“CLN”) is issued by the Department of State.
• Finally, the U.S. citizen should attend their appointment at the consulate or embassy and submit the properly prepared Form 8854. The citizen will have to sign the oath of renunciation during their appointment. After the expatriation is official, the U.S. citizen will file their final tax return and may be subject to further reporting requirements (these will be covered in a future post).

How is the exit tax calculated?

The exit tax only applies if you (i) exceed a certain income tax threshold (for the year 2025, an average of $206,000 over a 5-year period) or a $2 million net worth or (ii) failed to certify on IRS Form 8854 that you have complied with all your U.S. tax filing obligations for the previous five years. Once you determine that the exit tax might apply to you, you must calculate the exit tax by (i) identifying the date of expatriation and (iii) identifying the assets that are owned on the day before such expatriation date, by reference to the rules determining what is includable in an estate for U.S. estate and gift tax purposes. These assets are treated as “deemed” sold as of the expatriation date, and thus the fair market value and basis of such assets on such date must be determined to calculate the deemed gain on the “disposition”.

At this point, the tax bill might look ugly. Fortunately, the IRS allows taxpayers to exclude (what could be) a large chunk of the tax upfront. The amount that can be excluded from the deemed gain is $890,000 for the year 2025. Any excess will be subject to the exit tax (at ordinary income or capital gain tax rates, as appropriate).

Think carefully before making the oath

Renouncing U.S. citizenship is a serious decision, and not only for issues described above. Before considering this option, you should be aware that expatriation is a complex process with significant legal and reporting requirements. In addition, for American with extensive portfolios of financial assets, the tax ramifications of expatriation can be extremely costly.