Giving up U.S. citizenship can trigger a one-time federal tax called the expatriation tax, or exit tax. It applies only if you are a “covered expatriate” — someone whose worldwide net worth is $2 million or more, whose average annual federal income tax over the previous five years exceeds $211,000 (the 2026 figure), or who cannot certify five years of full tax compliance. If any of those applies, the IRS treats your worldwide assets as sold the day before you renounce and taxes the net gain above a $910,000 exclusion at capital gains rates. On top of that, you file a dual-status return and Form 8854 for the year you leave, and any gifts or bequests you later make to U.S. citizens or residents can be taxed at 40% in their hands.
Who Owes the Exit Tax
Most people who renounce do not owe the exit tax. It falls on covered expatriates, and you become one by tripping any one of three tests:
- Your worldwide assets minus liabilities equal $2 million or more on the day before your expatriation date.
- Your average annual net federal income tax for the five tax years before expatriation exceeds an inflation-adjusted threshold ($211,000 for 2026).
- You cannot certify under penalty of perjury that you have met all federal tax obligations for the five preceding tax years.1Internal Revenue Service. Expatriation Tax
The compliance test is the one that catches people. Modest income and modest assets do not protect you if there are unfiled returns, an unresolved audit, or unreported foreign accounts sitting in your background. Cleaning up prior years before you renounce is the only way to avoid getting swept into covered status by default.
Two narrow exceptions exist. Dual citizens from birth who were never U.S. residents, never held a U.S. passport, and spent no more than 30 days in the country during any of the ten calendar years before expatriation may be exempt. Minors who expatriate before age 18½ can also escape covered status if neither parent was a U.S. citizen at their birth and they meet similar presence limits.2Office of the Law Revision Counsel. 26 U.S. Code 877 – Expatriation to Avoid Tax Very few people qualify.
How the Exit Tax Is Calculated
The exit tax uses a mark-to-market system. On the day before your expatriation date, every asset you own is treated as if you sold it at fair market value. Nothing actually changes hands; the IRS just calculates the gain or loss as though it had. Real estate, stocks, private business interests, collectibles, and cryptocurrency all get a deemed sale price.3Internal Revenue Service. Expatriation On or After June 17, 2008 – Mark-to-Market (MTM) Tax Regime
A built-in exclusion shields part of the gain. For 2026, the first $910,000 of net gain is excluded.4Internal Revenue Service. Revenue Procedure 2025-32 Anything above that is taxed at capital gains rates of 0%, 15%, or 20% depending on your total taxable income. High earners also owe the 3.8% net investment income tax, pushing the effective ceiling to 23.8%.
Losses on depreciated assets can offset gains inside the calculation, so the tax hits your net position, not each asset separately. Getting the numbers right takes formal appraisals for anything without a ready market price, such as closely held businesses, real estate, and art. If you cannot substantiate a cost basis, the IRS can assign one that produces a larger gain.
If you became a U.S. resident later in life rather than being born here, there is some relief. Property you owned on the day you first became a U.S. resident gets a stepped-up basis equal to its fair market value on that date, so you only owe exit tax on appreciation that happened while you were a U.S. person. The adjustment does not apply to U.S. real property interests or property used in a U.S. trade or business, though a treaty-based exception may restore it if you were a resident of a treaty country at the time.
Retirement Accounts and Deferred Compensation
Traditional 401(k)s, IRAs, pensions, and other deferred compensation sit outside the mark-to-market calculation and follow their own rules. The tax treatment depends on whether the account is “eligible” or “ineligible.”
An eligible deferred compensation item is one where the payor is a U.S. person (or a foreign payor that elects U.S. treatment) and you irrevocably waive any right to reduce withholding under a tax treaty. Meet those conditions, and the payor withholds a flat 30% from every distribution paid to you after expatriation.5Internal Revenue Service. Notice 2009-85 You pay tax gradually as the money comes out.
Ineligible deferred compensation is treated much more harshly. The entire present value of the account is deemed received the day before expatriation, producing an immediate tax bill on money you have not touched. For a large pension or deferred bonus arrangement, that can mean a six- or seven-figure liability overnight. Distributions from non-grantor trusts to a covered expatriate also face the 30% withholding, with the trustee responsible for deducting and remitting it.1Internal Revenue Service. Expatriation Tax
Later Gifts and Bequests to U.S. Family
The exit tax is not the last tax consequence. Under Section 2801 of the Internal Revenue Code, any U.S. citizen or resident who receives a gift or inheritance from a covered expatriate owes tax equal to the highest estate and gift tax rate, currently 40%, on the value received.6Office of the Law Revision Counsel. 26 USC 2801 – Imposition of Tax The recipient pays, not the former citizen. An annual exclusion applies ($19,000 for 2026), and any foreign gift or estate tax already paid on the same transfer reduces the Section 2801 bill.
Recipients report these transfers on IRS Form 708, which became available in late 2025.7Internal Revenue Service. About Form 708, United States Return of Tax for Gifts and Bequests Received From Covered Expatriates The filing deadline is the 15th day of the 18th month after the calendar year the gift or bequest was received, with an automatic six-month extension available for filing but not for payment. Paying the tax does not raise the recipient’s income tax basis in the property, so it is a pure additional cost with no offset on a later sale.
If you plan to leave money to U.S.-based family after you renounce, they could lose 40% off the top. Many people restructure wealth transfers before expatriating for that reason alone.
Social Security After You Renounce
Renouncing does not automatically wipe out Social Security you earned while working in the U.S. Whether payments continue depends mostly on where you live. If you reside in one of the roughly 30 countries with a totalization agreement with the United States, benefits generally continue without interruption.8Social Security Administration. U.S. International Social Security Agreements In countries without an agreement, payments may be reduced or suspended under country-specific rules. Treasury sanctions block payments to residents of Cuba and North Korea entirely, and several former Soviet republics face significant restrictions.9Social Security Administration. Your Payments While You Are Outside the United States
Medicare is different. Coverage generally does not extend outside the United States, so former citizens abroad lose practical access even if technically enrolled. Renouncing before enrolling at 65 can cost you eligibility altogether.
The Act of Renouncing and the State Department Fee
The legal act of renouncing takes place at a U.S. embassy or consulate abroad; you cannot do it on U.S. soil except through a separate USCIS process. The State Department requires Form DS-4079 (the loss of nationality questionnaire), at least two in-person appointments with a consular officer, and a formal oath of renunciation. Bring proof of U.S. citizenship, a valid photo ID, and evidence of any other nationalities.
The fee for processing a Certificate of Loss of Nationality dropped from $2,350 to $450, effective April 13, 2026.10Federal Register. Schedule of Fees for Consular Services – Fee for Administrative Processing of Request for Certificate of Loss of Nationality of the United States That is a steep drop from the fee in place since 2014. Wait times vary; some posts process within weeks, others carry backlogs of several months.
Your expatriation date for tax purposes is the date you perform the renunciation act, typically the date of the oath. It is not the date the State Department finishes issuing the Certificate. The tax clock starts on the oath date regardless of administrative delay.
What You File and When
The year you renounce, you file a dual-status tax return. Form 1040 covers the portion of the year you were still a citizen; Form 1040-NR covers the rest of the year after your expatriation date. The 1040 attaches as a schedule to the 1040-NR.11U.S. Department of State. US Tax Consequences Expatriation Both follow the standard April filing deadline.
Alongside the return, you file Form 8854, the initial expatriation statement. It requires a complete inventory of assets and liabilities to calculate net worth, your five-year average tax liability, and the mark-to-market gain or loss. You certify five years of tax compliance under penalty of perjury on this form.12Internal Revenue Service. Instructions for Form 8854 – Initial and Annual Expatriation Statement Cost basis documentation for every asset matters. Without it, the IRS can use less favorable figures. Late filing carries a penalty of 5% of unpaid tax per month, up to 25%.13Internal Revenue Service. Failure to File Penalty
Deferring the Exit Tax and Filing Every Year After
You do not have to pay the whole exit tax upfront. Covered expatriates can make an irrevocable election to defer the tax on a property-by-property basis. You must post adequate security (a bond, letter of credit, or other collateral the IRS accepts) and waive any treaty-based protection against assessment or collection.1Internal Revenue Service. Expatriation Tax Interest accrues from the original due date, so the total grows over time. The deferral ends when you dispose of the property, when you die, or when your security stops meeting IRS requirements and you fail to fix the problem within 30 days. Early payoff carries no penalty.
Form 8854 is not always a one-time filing. If you elected to defer the exit tax, hold eligible deferred compensation, or are a beneficiary of a non-grantor trust, you must file Form 8854 every year to report distributions or certify that none were received. The annual filing continues until the deferred tax is fully paid or the accounts are exhausted.12Internal Revenue Service. Instructions for Form 8854 – Initial and Annual Expatriation Statement