The U.S. Exit Tax: What You Must Know BeforeLeaving America

Are you planning to surrender your Green Card or U.S. citizenship? The IRS Expatriation Tax could

force you to pay significant taxes on unrealized global assets. Learn the thresholds for becoming a

covered expatriate and essential pre-departure planning strategies.

What is the Exit Tax?

The U.S. exit tax (or expatriation tax) is essentially a toll charge applied when you formally renounce your U.S. citizenship or surrender your long-term permanent resident (Green Card) status. Enacted under Section 877A of the Internal Revenue Code, it is designed to ensure that the U.S. Treasury captures tax on the unrealized appreciation of your worldwide assets before you leave the U.S. tax net.

For expatriates in the US-India corridor, this can be particularly complex. Many hold significant assets in both countries, including real estate, mutual funds, PF accounts, and stock options. If you meet certain thresholds, you become what the IRS calls a "Covered Expatriate," subjecting your global net worth to a deemed "mark-to-market" capital gains tax as if you sold everything on the day before your expatriation.

Why it matters: Even if you don't actually sell any of your assets, you may still owe significant tax. Furthermore, failure to properly file the required forms (like Form 8854) can automatically classify you as a covered expatriate, regardless of your net worth or tax liability.

The Three Covered Expatriate Tests

You will be considered a "Covered Expatriate" (and thus subject to the exit tax) if you meet any one of the following three tests on the date of expatriation:

1. Net Worth Test — $2,000,000

Your global net worth is $2 million or more on the date of expatriation. This includes the fair market value of all assets worldwide (real estate, retirement accounts, business interests, etc.) minus your liabilities.

2. Tax Liability Test — $211,000

Your average annual net income tax liability for the 5 years ending before the date of expatriation is strictly greater than the inflation-adjusted threshold ($211,000 for 2026).

3. Compliance Test — Form 8854

You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 preceding taxable years. (This catches many who are otherwise below the monetary thresholds.)

How the Tax is Calculated

If you trigger covered expatriate status, the IRS applies a "mark-to-market" regime. This means all of your property worldwide is treated as if it were sold for its fair market value on the day before your expatriation date.

The Exclusion Amount

Fortunately, there is an exemption threshold. For 2026, the first $910,000 of calculated net capital gain is excluded from the tax. You only pay capital gains tax on the phantom gains that exceed this amount.

Special Rules for Certain Assets

• Deferred Compensation (e.g., 401k, Pensions): Subject to a 30% withholding at source when paid out, rather than the immediate mark-to-market tax, provided you notify the payor and file Form W-8CE.

• Specified Tax-Deferred Accounts (e.g., IRAs, HSAs): Treated as receiving a full distribution on the day before expatriation. This can trigger ordinary income tax and potential early withdrawal penalties.

• Non-Grantor Trusts: Complex rules apply, generally resulting in 30% withholding on the taxable portion of future distributions.

Essential Filing Requirements

The paperwork does not stop the day you turn in your passport or green card. Ensure you correctly file:

• Form 8854 (Initial and Annual Expatriation Statement): This is the critical form where you declare your net worth and certify your prior 5 years of tax compliance.

• Form W-8CE: Notice of Expatriation and Waiver of Treaty Benefits. Must be provided to payers of deferred compensation within 30 days of expatriation.

• FBAR (FinCEN 114) & FATCA (Form 8938): You must still report your foreign financial assets for the portion of the year you were a U.S. person.

• State Tax Returns: Severing ties with the IRS does not automatically sever ties with your state (like California or New York). State residency is determined by separate rules.

After Expatriation

Non-Resident Alien (NRA) Taxation

You will be taxed as a Non-Resident Alien on U.S.-source income. This typically means a flat 30% withholding on dividends, rents, and royalties, unless a tax treaty provides a lower rate.

Estate Tax Exposure

The U.S. estate tax exemption drops drastically from $13.99M (for U.S. citizens/domiciles) to just $60,000 for NRAs. Any U.S. situs assets (like U.S. real estate or U.S. stocks) over $60K could be subject to estate tax up to 40%.

Appreciated Securities

While NRA capital gains on U.S. stocks are generally tax-free in the U.S. (provided they are not U.S. real property interests), you must be careful not to trigger the 183-day physical presence test in the year of your departure.

The Exit Tax Is Complex. Your Strategy Shouldn't Be an Afterthought. Pre-expatriation planning is crucial. Once you expatriate, the rules are set in stone. The Northstar CPAs team specializes in cross-border tax planning for the US-India corridor and can help you navigate Form 8854 compliance, valuate your assets, and minimize your exposure to the exit tax.