The US Exit Tax: Giving Up a Green Card or US Citizenship

The US exit tax, formally the expatriation tax under section 877A of the Internal Revenue Code, is a charge that can arise when a US person permanently severs their US tax status. It exists because the United States taxes its citizens and residents on worldwide income. When you leave that net for good, the US wants to tax the built-up gains in your assets before you are beyond its reach.

The tax is not triggered by simply moving abroad. It is triggered by a formal act of expatriation: renouncing US citizenship, or abandoning a green card if you are a long-term resident (see below). Once you take that step, you file Form 8854 with the IRS to declare your expatriation and to work out whether you are a covered expatriate.

The crucial point is that the exit tax only applies to covered expatriates. A large number of people who give up citizenship or a green card are not covered, either because they fall below the thresholds or because they clean up their affairs first. If you are not a covered expatriate, there is no mark-to-market charge at all, though you still file Form 8854 to prove it.

For British nationals this typically comes up in two situations: a Brit who worked in the US on a green card and now wants to come home, and a dual UK/US citizen who wants to shed US citizenship to escape lifelong US filing and the reach of FATCA. In both cases the analysis is the same, but the mechanics of giving up a green card versus citizenship differ.

You are a covered expatriate if you meet any one of three tests on the date you expatriate. Meeting a single test is enough; you do not have to fail all three.

• Net-worth test: your net worth is $2 million or more on the date of expatriation. This is a hard, non-inflation-adjusted figure and it captures worldwide assets, including UK property, pensions valued for this purpose, and business interests.
• Income-tax test: your average annual net US income tax liability for the five tax years before expatriation exceeds an inflation-adjusted amount. That amount is $206,000 for 2025 and $211,000 for 2026. Note this is tax paid, not income earned, so it can be surprisingly hard to hit on modest US tax bills.
• Certification test: you fail to certify on Form 8854, under penalty of perjury, that you have complied with all US federal tax obligations for the five years before expatriation. Even a person well below the money thresholds becomes a covered expatriate purely by failing to be five years compliant.

That third test is the one that catches people out. Many long-term Brits abroad have gaps in their US filing, unfiled FBARs, or missing Forms 8938. If you cannot certify five clean years, you are automatically covered regardless of your wealth. This is why the compliance clean-up usually has to start well before you expatriate.

There are narrow relief routes. Certain dual citizens from birth, and some who expatriate before the age of 18-and-a-half and were US resident in no more than 10 of the last 15 tax years, can be exempt from the two money tests if they meet strict conditions, and the IRS operates separate Relief Procedures for Certain Former Citizens for low-risk non-compliant individuals. These are specialist carve-outs to confirm case by case.

Renouncing US citizenship always counts as expatriation for section 877A. Giving up a green card only counts if you are a long-term resident. You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your green card status ends.

That 8-of-15 rule matters enormously. A Brit who held a green card for, say, six years and then handed it back is not a long-term resident and is not subject to the exit tax on abandonment, no matter how wealthy. Someone who held it for a decade is, and must run the covered-expatriate tests. Note that a part-year counts as a full year for this test, so a card held for even one day in a tax year uses up one of those years, and the clock can run faster than you expect.

There is also a treaty trap for green-card holders. If you are a long-term resident and you start claiming to be a non-US resident under a tax treaty with another country (a treaty tie-breaker position), and you notify the IRS without waiving the treaty benefit, that can itself be treated as ending your resident status and can start the expatriation clock. British green-card holders who quietly rely on the UK-US treaty to become UK-only resident need to understand this before doing so.

Practically, abandoning a green card is done by filing Form I-407 or through a formal determination; renouncing citizenship is done at a US consulate and carries a fee. Whichever route applies, the tax event is pinned to the expatriation date, and Form 8854 is due with your final-year return. Getting the date right, and getting your net worth and compliance where you want them by that date, is the whole game.

If you are a covered expatriate, section 877A treats you as having sold all of your worldwide property at fair market value on the day before your expatriation date. This is the mark-to-market or deemed-sale rule. You do not actually sell anything; the gain is calculated as if you had, and it is reported on your final-year US return.

The net gain from this deemed sale is then reduced by an exclusion amount before any tax is due. The exclusion is $890,000 for 2025 and $910,000 for 2026, indexed for inflation. Only gain above that exclusion is taxed, so a covered expatriate whose total unrealised gain is under roughly $900,000 may pay little or no exit tax even though they are technically covered.

There is no single exit-tax rate. The deemed gain keeps its character: long-term capital gains are taxed at long-term rates, ordinary items at ordinary rates, and the 3.8% net investment income tax can also apply. The result is a real US tax bill on paper gains, payable even though no cash has come in from an actual sale.

A deferral election exists. You can elect to defer the exit tax attributable to a particular asset until you actually sell it, but only if you post adequate security acceptable to the IRS (such as a bond), agree to waive treaty benefits that would block collection, and pay interest. It is a genuine option for illiquid assets such as a UK trading company, but the security requirement makes it heavy in practice. Certain assets, notably deferred compensation, tax-deferred accounts and non-grantor trust interests, are carved out of the mark-to-market rule entirely and taxed under their own regimes.

Pensions and similar arrangements do not go through the mark-to-market deemed sale. They fall into three separate buckets, each with its own treatment, and this is where the biggest surprises live for people with substantial 401(k) or IRA balances.

• Eligible deferred compensation (for example many US employer 401(k) and pension plans where the payer is a US entity and you give the required notice on Form W-8CE): not taxed at expatriation. Instead, when payments are later made, the payer withholds a flat 30% on each taxable payment. To use this treatment you must irrevocably waive any treaty right to a reduced withholding rate on those payments.
• Ineligible deferred compensation (broadly, plans that do not meet the eligible conditions, often foreign or unfunded arrangements): treated as if the present value of your entire accrued benefit were distributed to you on the day before expatriation, and included in income on that final-year return, with a basis adjustment going forward.
• Specified tax-deferred accounts (IRAs, and accounts such as HSAs and 529 plans): treated as fully distributed to you on the day before expatriation. The entire account value is included in income on your final-year return, but the usual early-withdrawal penalty does not apply to this deemed distribution.

Interests in non-grantor trusts are a fourth category. Where you were a beneficiary before expatriating, distributions from the trust after expatriation are generally subject to 30% withholding on the taxable portion, again with treaty benefits waived, rather than a deemed sale up front.

The UK side then has to be layered on. Roth IRAs, traditional IRAs, 401(k)s and UK pensions each interact with the UK-US treaty and with UK tax on the way out and on later withdrawal. A deemed US distribution of an IRA does not necessarily line up with a UK taxing point, which can create timing mismatches. This is a case-by-case exercise and the interaction should be modelled, not assumed.

Almost all exit-tax planning has to happen before the expatriation date. Once you have renounced or abandoned the green card, the position is largely fixed. The goal for a Brit leaving the US net is usually to avoid becoming a covered expatriate at all, or, if that is impossible, to shrink the deemed gain.

• Get five years compliant first. Because the certification test makes you covered by default if you are not, filing any missing returns, FBARs and information forms before you expatriate is often the single most important step.
• Watch the net-worth and income tests. The $2 million net-worth test and the income-tax test are date-sensitive. Gifting within annual and lifetime limits, the timing of asset sales, and the treatment of jointly held assets can all move you across the line, but must be done carefully and in advance.
• Mind the long-term resident clock. If you hold a green card, whether you are approaching 8 of 15 years can change everything. Some people choose to give the card back before the clock trips; others cannot, and plan for coverage instead.
• Sequence the move with UK residence. Coordinating the US expatriation date with UK arrival and, where relevant, the UK four-year FIG regime that replaced the non-dom rules from 6 April 2025 can reduce double taxation on the same gains. This is exactly the kind of two-sided timing our practice models.
• Do not fall foul of the inheritance-tax succession rule. Gifts and bequests received from a covered expatriate can attract a separate US tax on the recipient at 40% under section 2801, now operative through Form 708 following final regulations in January 2025, so the planning affects your heirs too, and should be confirmed for your situation.

The through-line is that the exit tax rewards early, coordinated advice on both sides of the Atlantic and punishes people who act first and ask later. A Global Compliance Manager engagement with our team is built to run the US and UK analysis together, on your actual numbers, so the expatriation date is chosen with the full picture in view.