Ep 66: Before You Expatriate, Understand The Exit Tax
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This conversation delves into the complexities of the exit tax that individuals may face when expatriating from the U.S.
The decision to expatriate is not one to be taken easily. We discuss who is liable for the exit tax, how it is calculated, and the ongoing tax obligations that may persist even after leaving the country.
We also explore various planning considerations to mitigate the impact of the exit tax, emphasizing the importance of careful planning and timing in the expatriation process.
Key Takeaways
An exit tax is imposed when one expatriates from the U.S.
Covered expatriates must meet specific criteria to be liable for the exit tax.
The exit tax calculation is based on various asset types and their locations.
Post-expatriation, individuals may still owe U.S. taxes on certain income.
The timing of expatriation can significantly affect tax liabilities.
Asset transfers and gifting can help mitigate the impact of an exit tax.
Retirement accounts may be subject to high taxes for non-resident aliens.
Trust and estate planning are crucial for expatriates.
Treaty considerations can influence exit tax obligations.
Chapters
00:00 Understanding Exit Tax: An Overview
02:45 Who is Liable for Exit Tax?
05:57 Calculating the Exit Tax
08:58 Post-Expatriation Tax Obligations
11:46 Planning Considerations to Mitigate Exit Tax
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Jane Mepham, CFP (00:02)
What’s an exit tax, and who’s liable to pay the exit tax?
Lately, Manasa and I have been getting a very common question because of the conditions and what’s happening here. It goes something like this: “I want to leave the U.S. and simply cut ties and never have to worry about what’s happening here. I want to move my money overseas.”
Okay, maybe not so fast, because you may have to pay an exit tax if you give up your citizenship and your green card. Today we’re going to tell you all about this: What’s an exit tax? Who’s liable for it? And at the end, we’ll give you some planning considerations.
Manasa Nadig, EA (00:51)
Yes. So let’s start with what is an exit tax.
An exit tax is basically exactly what it says: You pay a tax when you want to expatriate or leave the country. There are many considerations that go into who is subject to this, how that is determined, and how the tax is actually calculated.
So let’s break that down and first talk about who would be subject to an exit tax. If you give up your U.S. citizenship, whether you were a naturalized citizen or you were born in the U.S., it doesn’t matter. This would also apply to you if you were a green card holder for eight out of the last 15 years.
Section 877A applies to everything that we’re talking about today. For an expatriate to be called a “covered expatriate,” the individual has to satisfy one of three tests. Remember, that’s one of three tests:
• The net worth test, which means that their worldwide net worth is 2 million dollars or more on the date of expatriation.
• The tax liability test, which means that the individual’s average annual net income tax obligation for the five years prior to the date of expatriation exceeds a certain amount, which for 2026 is 211,000 dollars.
• The tax compliance test, where someone has to certify (or fails to certify) under penalties of perjury, on Form 8854, that they have complied with all of their U.S. federal tax obligations for those five years.
If you come under any one of these, then you are what is called a “covered expatriate,” and you may be subject to exit tax.
Jane Mepham, CFP (03:24)
Okay, assuming you’re now a covered expatriate, I’m curious—could you briefly go into how the exit tax is calculated?
Manasa Nadig, EA (03:37)
Yeah, so this is not going to be a back‑of‑the‑envelope calculation, folks. You absolutely cannot just do that at all.
Let’s give you a high‑level overview of things anyway, because we want you to be educated and know what to expect. The actual calculation of the exit tax is based on the type of assets you have, whether they are tax‑deferred assets, deferred compensation, and where they are located—whether in the U.S. or foreign. Even your foreign assets will be counted to calculate that 2 million dollars.
All of these things are taken into account, and different tax rates are applied to the different types of assets that you have. All of this is calculated on Form 8854.
Right now, there’s a lot going on because of new final regulations that were published under Section 2801. After many years—more than a decade—of waiting for a new form, the IRS has finally published Form 708, which is available for calculation of some gift taxes, etc. So there’s a lot changing in this area.
If you’re a person who’s thinking, “Wait, did I hear this right? Maybe one of these tests applies to me. Maybe I have more than 2 million dollars in assets,” which is not that difficult these days with a good, healthy 401(k); or maybe it’s the tax compliance test; or maybe you’ve owed more than 211,000 dollars in taxes—if you’re thinking of leaving the U.S. and one of these may apply to you, please consult an attorney or a qualified cross‑border tax expert to know if this exit tax would be applied to you and how that will be determined.
Jane Mepham, CFP (06:28)
You know, Manasa, one of the things I absolutely love when we do this is that you’ve memorized all these forms and sections of the tax code, which is absolutely amazing to me and a really good thing.
I’m very happy that if I’m thinking, “What’s this form?” you’d be able to tell me right away. As we’re thinking about all these different forms, one thing that now comes to mind based on everything you just said is: There have to be some post‑expatriation tax obligations. We know the U.S. just doesn’t let you go off like that.
So what are some of those considerations or tax obligations, even though we’re assuming at this point you’ve given up your citizenship or your green card? What are some of those?
Manasa Nadig, EA (07:18)
Good catch, Jane. Yes.
Even if you leave the U.S. and pay the exit tax, if you are subject to it, unfortunately you may continue to have U.S. tax obligations in certain cases. One is if you continue to have U.S.‑source income. That’s almost understood—if you are leaving behind a rental property, for example, or some brokerage accounts from which there will be interest and dividends (U.S.‑source income).
Maybe you still have your retirement accounts here—your 401(k)s, 403(b)s, etc.—which you do not take with you or do not plan to. Those distributions will be subject to tax.
Another big one is gift and estate taxes. You could continue to be subject to those, which is a whole other episode we’d love to come back to another time. Those are some tax obligations you would continue to owe to the U.S. government even after you exit.
Jane Mepham, CFP (08:29)
Okay, so it sounds heavy for sure—and it is.
The way I’m looking at this now is: We know there’s all that that you’ve talked about, but you do have some planning considerations or things you can do to plan for this. I know the exit tax can’t always be entirely avoided for covered expatriates, but you have to plan very carefully to potentially mitigate its impact.
So, timing of expatriation is going to be key, because when you expatriate, that determines your net worth and your average annual net income tax liability. This is not a decision where you wake up and say, “I’m out of here.” You really want to plan and time it.
You also want to consider asset transfers and gifting, because this will reduce your net worth and potentially mitigate the exit tax impact on some assets—but it really needs to be executed well in advance. Otherwise, there could be what they call anti‑abuse rules.
You also want to think about your retirement account planning. You’re going to be leaving your 401(k), your 403(b), your Roth IRA.
And let’s take into consideration the fact that you’re about to become an NRI—
Manasa Nadig, EA (10:03)
Hey, not an NRI, an NRA, because an NRI is a non‑resident Indian.
Jane Mepham, CFP (10:11)
I’m sorry—I think I have India on my mind, I just spoke to a client from India.
So, NRA, which means non‑resident alien, which means you’re still going to be obligated to pay, for example, on the 401(k), something like a 30% tax when you take the money out. It also means your estate tax exemption is 60,000 dollars. So there are some really serious planning considerations in there.
Then there’s trust and estate planning. You may want to reconsider restructuring trusts. You may want to decant, or take assets out of some of the trusts. You may do what we call “domesticating foreign assets.” There’s a lot of estate planning you can do, again, to mitigate the exit tax impact on beneficial interests and future distributions from some of these trusts.
Can you think of any more?
Manasa Nadig, EA (11:16)
Definitely.
There are also treaty considerations depending on where this person might end up going and whether that country has a treaty with the U.S.—whether it is an income tax treaty, an estate tax treaty, or a social security totalization agreement, and so on. All of these will potentially impact the exit tax or may even eliminate it; we don’t know until we know what country it is.
There are also valuation considerations. There is a lot of volatility in stocks and shares, and when you’re considering trust and estate planning and asset transfers and gifting, there are planning opportunities for valuation.
Remember, for unrealized gains there is an exclusion under this income tax of about under 1 million dollars at this point, which is adjusted for inflation, so it depends on when you expatriate. These are planning considerations for sure: If you know where you’re going, then take treaty considerations into account, and everything I just said about valuation and the fact that if you’re going to be leaving behind assets in the U.S., who your beneficiaries are going to be, and what you’ve put in place so that under the new 2801 rules they may or may not be subject to tax again if you give those assets back to them.
That will make more sense when we come to that. But that’s what I’d like to add here, just so people listening know that these are all among the things that go into what an exit tax is.
Jane Mepham, CFP (13:23)
Okay, so we’ve told you what an exit tax is. We’ve also told you how to mitigate it and what planning considerations we have, which is really the goal of our podcast—educating you on some of these things.
With that, I think we’re good to conclude.
Manasa Nadig, EA (13:46)
Absolutely.
Thank you so much, dear listener, for being with us today. If you like our content, please go to our website: theimcafe.com (t-h-e-i-m-c-a-f-e.com).
Don’t forget to check out our store. We have a very cutely named store and lots of goodies. We also have a checklist you can use to check off things you need to do if you’re planning to exit the U.S. So go check out our store.
Thanks again for listening, and we’ll be back with more. Bye.
Jane Mepham, CFP (14:27)
Bye.
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The speakers' views and opinions discussed in this episode should not be considered financial, tax, or legal advice. Consult your advisor for any legal, cross-border tax, and financial advice.