US Expatriation Tax: The Covered Expatriate Rules

The US exit tax can apply when you renounce citizenship or give up a green card. We explain the covered expatriate tests and the mark-to-market charge.

Few areas of US tax are as misunderstood, or as easy to mishandle, as expatriation. The decision to give up US citizenship or long-term residence is rarely only emotional or practical. For anyone with meaningful assets, it can trigger a one-time US expatriation tax, commonly called the exit tax, that treats your worldwide assets as if sold on the day before you leave.

The rules apply not only to citizens who renounce but also to long-term green card holders who relinquish their status. And critically, the tax does not fall on everyone who expatriates. It falls on those who meet the definition of a covered expatriate.

This guide explains who is caught, how the charge is calculated, and where careful planning before you act can make a decisive difference.

Who is a covered expatriate

When you formally expatriate, you are tested against three criteria. Meeting any one of them generally makes you a covered expatriate.

The first is the net worth test: your worldwide net worth is at or above 2 million US dollars on the expatriation date. The second is the net income tax test: your average annual US income tax liability over the five years before expatriation exceeds an inflation-adjusted threshold, which is in the region of 200,000 US dollars as at 2026. The third is the certification test: you fail to certify, under penalty of perjury, that you have complied with all US federal tax obligations for the five preceding years.

That third test is the quiet trap. Even a person of modest means with a clean net worth profile becomes a covered expatriate simply by being unable to certify five years of full compliance. For US persons abroad who have fallen behind on filings, this often needs remediation before expatriation is even contemplated.

Limited exceptions exist, for example for certain dual citizens from birth and for some who expatriate before adulthood, but they are narrow and fact-specific.

The mark-to-market exit tax

For covered expatriates, the centrepiece is a mark-to-market regime. You are treated as having sold all of your worldwide property at fair market value on the day before expatriation. The net unrealised gain across that deemed sale is then subject to tax, with an inflation-adjusted exclusion that shelters an initial slice of gain. As at 2026 that exclusion is in the region of 800,000 US dollars, though the precise figure is indexed annually.

The deemed sale reaches almost everything: shares, business interests, real estate, intellectual property and personal assets. Because it is a notional sale, it can create a substantial tax bill with no actual liquidity event behind it. An election to defer the tax on particular assets may be available, but it generally requires adequate security and an interest charge, so it solves timing rather than cost.

Certain assets are handled under separate regimes rather than the mark-to-market rules, most importantly deferred compensation and tax-deferred accounts, which can be subject to immediate tax or to withholding on later distributions, and interests in non-grantor trusts, which carry their own withholding mechanics.

The succession sting: the inheritance tax on gifts to US recipients

Expatriation does not only affect the expatriate. A separate and often-overlooked rule imposes a transfer tax on US citizens or residents who later receive gifts or bequests from a covered expatriate. The recipient, not the expatriate, bears this charge, and it can apply long after the expatriation itself.

This makes expatriation a multi-generational planning question, not a personal one. A covered expatriate who intends to leave assets to children or grandchildren who remain US persons needs to model this charge carefully, because it can erode the very wealth the family hoped to preserve.

Planning before you act

Almost all effective planning happens before expatriation, not after. Once the date passes, the deemed sale has occurred and the position is largely fixed.

The most important lever is the net worth and gain profile on the expatriation date. Lifetime gifting within applicable rules, the timing of asset sales, the valuation of private business interests and the structuring of holdings can all influence whether the net worth and income tests are met and how large the deemed gain is. Because valuations drive the charge, defensible, well-documented valuations of private assets are central.

Compliance comes first in sequence. Anyone who cannot cleanly certify five years of US tax compliance should regularise their filings before expatriating, often through established voluntary procedures, so that the certification test does not by itself create covered status.

Timing relative to other life events matters too. Receiving a large inheritance, selling a business or vesting significant compensation shortly before expatriation can move you across the thresholds or inflate the deemed gain. Sequencing these events thoughtfully, and where appropriate completing them in a different order, can change the outcome materially.

Finally, the destination matters. The country you move to, your future residency and the location of your assets all affect both the US analysis and the tax you will face going forward. Expatriation should be planned as one step in a coherent relocation strategy, not in isolation.

How HPT helps

We advise individuals contemplating renunciation of US citizenship or relinquishment of long-term residence on the full picture: whether they will be a covered expatriate, how large the exit tax is likely to be, how deferred compensation, pensions and trusts are treated, and how the succession charge will affect US heirs. Working alongside US tax counsel, we help structure and sequence the steps, support defensible valuations, and align expatriation with the client's broader residency, citizenship and wealth plans.

If you are weighing the decision to expatriate, we can help you understand the real cost before you commit to it.