Expatriation

by John McLaughlin, in

If you no longer live in the United States, then you’ve probably wondered why you are continuing to file US tax returns every year. US citizens or Green Card Holders are taxed annually on their worldwide income and gains and have an ongoing obligation to file US federal tax returns, even if they earn less than the relevant exclusions and there is no tax due. With the ever-increasing list of confusing and complex IRS regulations, more and more citizens are being stung with unexpected tax bills and surcharges. If you’re one of those individuals, then you’ve probably thought about throwing in the towel, renouncing your US citizenship or giving up your Green Card and emancipating yourself. I am sorry to say, as with everything to do with US tax, it’s not that simple.

Expatriation Tax

The IRS don’t like to lose taxpayers so, as a parting gift, certain individuals are required to pay an exit tax when they renounce their citizenship or give up their Green Card. This tax only applies to US citizens and Long-Term Residents who are considered as Covered Expatriates.

Long Term Residents are individuals who have held a Green Card (lawful permanent residency) during any part of 8 of the previous 15 tax years (ending in the year of expatriation). Beware – holding a Green Card for even one day of a calendar year counts as a full year for this test, so it is possible to become a Long-Term Resident little more than 6 years after receiving your Green Card. If you are comfortably short of the 8-year mark, then you are able to expatriate with little or no fuss (as long as you are up to date with your filing obligations) – but if you are anywhere close, take advice on the counting before you act.

You are considered as a Covered Expatriate if:

  • Your average net tax liability over the previous 5 tax years is above certain thresholds – the threshold for 2026 is $211,000. The majority of US taxpayers living outside of the US are unlikely to be caught by this due to exclusions and credits available to residents of foreign countries.
  • Your net worth is greater than $2 million on the date of expatriation – this is your worldwide assets and includes any cash and the fair market value of all securities, property, pensions, trusts, i.e. anything with value, and converted to US Dollars. This is reduced by any liabilities, for example mortgages and other debts.
  • You have failed to comply with all your filing obligations for the previous 5 tax years.

The Exit Tax is income tax calculated on the net gain from the deemed sale (or distribution) of your worldwide assets on the day before the date of expatriation. But it’s not all doom and gloom, there is a $910,000 exclusion (for 2026) available to reduce your taxable gain. For most covered expatriates this is probably enough to reduce your taxable gain to zero, but for the lucky (or unlucky) few with multiple properties and a high net worth, there will probably be some tax to pay.

Deferred Compensation Items – A Trap Within the Trap

The exclusion amount sounds generous, but here’s the catch many people miss: it only applies to the deemed sale of your ordinary assets under the mark-to-market rules. It does not apply to what the IRS calls “deferred compensation items” – broadly, your pensions, retirement plans, share options and other rights to be paid compensation in the future. For a covered expatriate living in the UK, this is often where the real exposure sits, not in the investment portfolio.

Deferred compensation items are split into two camps. An eligible deferred compensation item is one where the payer is a US person (or a foreign payer that elects to be treated as one) and you agree, on Form W-8CE, to give up any treaty benefits on future payments. These items escape immediate tax on expatriation, but the price is a flat 30% US withholding tax on the taxable portion of every future payment – with no treaty relief to reduce it. An ineligible deferred compensation item is everything else, and this is where most UK-based pensions land. For these, you are treated as receiving the present value of your entire accrued benefit as a lump sum on the day before you expatriate, taxed as ordinary income – even though you haven’t actually received a penny and may not be able to access the pension for years. Crucially, the $910,000 exclusion amount cannot be used to shelter any of this deemed income; it is reserved solely for mark-to-market gains. So a covered expatriate whose investment gains are fully covered by the exclusion can still face a substantial US tax bill purely because of a UK pension scheme.

A similar rule applies to “specified tax deferred accounts” such as IRAs and 529 plans – these are treated as fully distributed the day before expatriation (with no early withdrawal penalty, mercifully), and again the exclusion amount offers no protection. If you hold significant pension or retirement assets, the value of pre-expatriation planning here cannot be overstated.

The Exceptions

If you were a dual citizen at birth where one country is the United States – for example, you were born in the UK to US parents – and you are a resident of the other foreign country on the date of expatriation then you will be exempt from being a covered expatriate, subject to a few residency requirements.

Also, certain minors (under the age of 18.5 on the date of expatriation) are exempt from expatriation tax, again subject to a few residency requirements.

For these exceptions to apply, you must be up to date with your US tax return filing obligations.

The Process

So, you’ve thought about it long and hard, you’ve done the maths. You’ve worked out that you’re not a covered expatriate or you’re happy to pay the tax bill. You’ve spoken to a lawyer about any possible repercussion and you’ve made your mind up. You’re going to expatriate! You should be aware that the process is slightly different for Citizens and Green Card Holders.

  • As a Citizen you will need to book an appointment at the US Embassy and make a formal renunciation of your citizenship in front of the US flag. The day you do this is usually considered as your date of expatriation. You should make sure you have a passport with another country before doing this. In welcome news, the State Department reduced the renunciation fee from $2,350 to $450 with effect from April 2026 – so at least the administrative cost of leaving is no longer eye-watering.
  • It’s a little simpler for Green Card holders, they just need to complete Form I-407 and submit this to USCIS. This is usually their date of expatriation unless they have claimed to be a resident of a foreign country under a tax treaty on Form 8833 submitted with their tax return.

It is important to note that an expired Green Card does not stop your tax return filing obligations. You will need to continue filing until you formally terminate your long-term residency on Form I-407.

Whichever route applies, the oath or the Form I-407 is not the end of the story. Your exit from the US tax system is only complete once you have filed your final year “dual-status” tax return together with Form 8854, the Initial and Annual Expatriation Statement. This is the form on which you certify that you have been compliant for the previous 5 years and report your assets for the exit tax calculation. Miss it, and you are automatically a covered expatriate – regardless of your income or net worth.

The Catch

Here’s something many people don’t realise: being a covered expatriate isn’t just a one-off exit tax problem. Under Section 2801, US citizen or resident who receives a gift or inheritance from a covered expatriate may need pay a tax of 40% on it – and unusually, it’s the recipient who pays, not the giver. There are some exemptions on certain transfers (e.g. to a US spouse) and thresholds (annual gift limits). This rule has technically existed since 2008, but the IRS only issued final regulations in January 2025 and has now released Form 708, the return on which these gifts and bequests must be reported. In other words, there is now a live enforcement mechanism where for years there was none. If your children or grandchildren are US citizens, covered expatriate status could cost them 40% of everything you ever leave them – long after you’ve handed back your passport. This is one more reason to establish whether you would be a covered expatriate, and deal with any compliance gaps, before you book the embassy appointment rather than find out afterwards.

If you were born in the US but left as a child, or acquired citizenship through a parent and have never really engaged with the US tax system, the IRS offers dedicated relief procedures that may allow you to exit without penalties and without being treated as a covered expatriate. We’ve covered this in detail in our separate article on tax relief for expatriating Accidental Americans.

Why retain your citizenship or Green Card?

This question is better aimed at an immigration lawyer. From a tax perspective, if you can avoid the exit tax, then there aren’t many positives to maintaining your US taxpayer status. But tax isn’t the answer to everything, for example the US has a lot of VISA-free travel with other countries that may be useful for an internationally mobile employee. Another reason may be that you want to return to live or work in the US at a later date. Regaining a Green Card can be problematic if you have renounced it previously.

This is a complex area and we will always recommend speaking with us directly or to an immigration lawyer for specific advice on your situation. With the right preparation you can mitigate the tax issues with elections, careful timing and timely filed returns.

The above article should not be taken as tax advice.