After years of anticipation, the State Department has finally cut the fee Americans must pay to renounce their U.S. citizenship to $450, down 80% from its previous fee of $2,350.
The fee cut was first announced in 2023, but was not previously implemented. The new lower fee returns the cost to the same approximate level the government charged when it first began requiring payment for citizenship renunciations in 2010.
While the lower fee is welcome news for potential renouncers, careful consideration must be given to the tax implications of renunciation.
In this blog, we review the tax and reporting implications of renouncing one’s citizenship (and abandoning one’s green card). We then describe how our firm can help you navigate the process.
We include a case study involving real facts, so that you can fully understand our approach and the services we offer.
Who is Covered for Exit Tax Purposes?
The exit tax potentially applies to so-called “covered expatriates,” a term that is specifically defined under the Internal Revenue Code (Sections 877 and 877A).
Under the Code, Under IRC Section 877A(g)(3), an “expatriate” is defined as either:
(1) a U.S. citizen who renounces (or otherwise loses) his or her U.S. citizenship, or
(2) a “long-term resident” who (i) abandons (or otherwise has revoked) his or her green card, or (ii) takes a treaty position that he is no longer a U.S. tax resident and notifies the IRS of the commencement of such treatment (i.e., by filing Forms 8854 and 8833 to claim the treaty position).
A “long-term resident” is defined in IRC Section 877 to mean an individual (other than a citizen of the United States) who is a lawful permanent resident of the United States (i.e., a green card holder) in at least 8 taxable years during the period of 15 taxable years ending with the taxable year during which the expatriation occurs (the “8-ouf-of-15-year rule”).
If an individual falls within the definition of an expatriate, then such individual is classified as a “covered expatriate,” subject to the exit tax rules, if at least one of three threshold tests is met:
- the individual’s average annual net income tax for the five taxable years ending before the date of expatriation exceeds a specified, inflation-adjusted amount ($211,000 in 2026);
- the individual’s net worth is $2 million or more; and/or
- the individual fails to certify that he or she has been in compliance with the tax and reporting requirements of the Code for the five preceding taxable years.
Exceptions to the exit tax may apply in the case of dual citizens from birth and certain minors who expatriate before the age of 18½.
Each individual's particular circumstances should be analyzed in order to determine if an exception properly applies.
How to Calculate the Exit Tax
In general, the exit tax on covered expatriates is a tax on the built-in appreciation in the expatriate’s property, as if the property had been sold for its fair market value on the day before the expatriation date. The current maximum capital gains rate is 23.8%, which includes the 20% capital gains tax and the 3.8% net investment income tax. Gain is recognized only to the extent that the deemed gain exceeds in aggregate $600,000, as indexed for inflation. For 2026, the indexed amount is $910,000.
In addition to the tax on the built-in appreciation in one's property, special rules apply with respect to deferred compensation items, such as pensions, which are held at the time of expatriation. As a general rule, a deferred comp item/pension will be deemed to have been withdrawn on the day before expatriation, resulting in ordinary income tax (up to the rate of 37%) on the taxable portion of the pension. This creates a potential risk of double taxation when the pension is actually withdrawn in a later year (as it may be taxed again locally). Certain exceptions apply to this tax, including with respect to foreign pensions that were established for services performed prior to becoming a U.S. person.
In addition to the exit taxes described above, the Internal Revenue Code imposes a tax on U.S. citizens or residents who receive gifts or bequests from covered expatriates. A U.S. recipient of a gift or bequest from a covered expatriate is subject to a tax equal to the value of the gift or bequest multiplied by the highest estate tax rate in effect on the date of receipt (the rate is 40% in 2026).
For the majority who pass the first two covered-expatriate criteria, avoiding the exit tax comes down to proving a history of tax compliance.
A delinquent taxpayer should consider entering into an IRS tax amnesty program to clean up the past and keep IRS penalties at bay, prior to renouncing.
The Streamlined Filing Compliance Procedures are available for U.S. expats whose failure to file was due to non-willful conduct. Under this popular tax amnesty program, the taxpayer is required to file the prior 3 years of tax returns, including required information returns, and 6 years of FBARs. A delinquent U.S. expat who complies with these procedures will have to pay previously unpaid taxes with interest, but will not be subject to any penalties.
The ETP Approach to the Exit Tax
At Expat Tax Professionals, we recognize that the big decisions require expert consideration. That is why we focus on being creative, practical and efficient. Our personalized service simplifies the complex and offers creative solutions to ostensibly difficult situations.
In this regard, we take a two-pronged approach to expatriation servicing: First, our advisory services ensure that a renouncer or green card abandoner can implement their decisions in the most tax-effective way available under the U.S. domestic tax and treaty rules.
Second, our compliance services ensure that the all reporting and disclosure requirements are met, both in the case of up-to-date filers and those who need an amnesty program to clean up the past.
Exit Tax - Client Case Study
Background: Clients are U.S. citizens living in the United Kingdom. Their combined assets exceed $4m, and the husband has a number of (U.S. and foreign) pensions and a significantly appreciated UK home. They want to fix past compliance mistakes and renounce their U.S. citizenships.
Services and Solutions: Our firm recognized the client’s need for both advisory and compliance tax services.
On the advisory side, we assisted with:
- Exit Tax Research – we advised on the nuances and implications of the exit tax rules and determined the exact exposure.
- Exit Tax Planning – we provided concrete and actionable solutions for eliminating adverse exit tax implications, including inter-spouse gifting strategies. This saved the client hundreds of thousands of dollars in taxes by avoiding the deemed distribution of the husband’s pensions. Our advice was documented in a detailed tax memorandum, a hallmark of our advisory deliverables.
- Global coordination – we coordinated with the client’s UK advisors to ensure a cohesive global approach that takes into account both U.S. and UK tax implications.
On the compliance side, we assisted with:
- Review of Past Returns – we reviewed the client’s previous tax returns and other submissions to see if amendments are needed.
- Cleaning up the Past – we prepared a Streamlined Domestic Offshore Procedures Amnesty Program submission to correct past returns and ensure full compliance in past years.
- Expatriation Compliance – we prepared the client’s tax return for the current year of expatriation, including preparing the Form 8854, the required form for expatriations.
Contact Us
If you are considering renouncing your U.S. citizenship or abandoning your green card, it is important that you understand the tax consequences before turning in your passport or green card for good.
Our experts at Expat Tax Professionals can help you understand the options and strategies available to you based on your particular circumstances. Our comprehensive approach to an effective renunciation can ensure that you are compliant and tax-efficient.
Contact us for more information.
