The Truth About Exit Tax: Why Some U.S. Expats Don’t Pay Attention to It

If you’ve ever seriously considered cutting ties with the U.S. and I mean really considered it, passport surrender and all, you’ve probably had that daydream. No more IRS paperwork. No more FBARs. No more getting grilled by bank clerks in Brussels who think your U.S. citizenship is a liability. The idea of finally stepping off the compliance treadmill can feel like freedom.

But then, usually buried in the fine print or mentioned casually by a tax advisor, you stumble across something called the exit tax. And that’s where things get complicated.

Oddly, it’s not a topic that comes up much in expat circles. Everyone talks about FATCA, sure. But the exit tax? It’s often dismissed as something only the ultra-rich have to worry about. Or worse, people don’t know it exists until they’re midway through renunciation and someone drops the words “Form 8854” like a bomb.

So… What Are We Actually Talking About?

The exit tax (technically the expatriation tax) is the IRS’s way of getting one last swing at you before you officially break up with Uncle Sam. If you fall into a certain category, what the IRS calls a “covered expatriate”, you may be treated as if you sold all your assets the day before you renounced. Not actually sold, just… for tax purposes. A hypothetical sale, but the taxes are real.

To land in that “covered” category, any one of these could do it:

• Your net worth is $2 million or more at the time of expatriation.
• Your average annual U.S. tax liability over the past five years is at least $206,000 (as of 2025).
• You can’t prove you’ve been fully tax-compliant for the past five years (yep, there’s a form for that too.)

And if your pretend profits from that pretend asset fire sale exceed about $890,000 (again, 2025’s number), you could owe a chunk of tax on gains you never actually realized.

Why Many Expats Don’t Give It Much Thought

Honestly? Most American expats are nowhere near those thresholds. If you’re teaching English in Osaka or doing freelance design in Lisbon, the odds that you’ve crossed the $2 million net worth line or racked up over $200k in average annual tax liability are slim.

Some people also assume that since they’re paying hefty taxes in places like Germany or Sweden, they must be covered. And sometimes that’s true. Foreign tax credits can help reduce your overall U.S. bill. But here’s the catch: the exit tax doesn’t always play nicely with those credits. And retirement accounts, especially the local ones, French pensions, Aussie supers, can turn into a mess once the IRS gets involved.

There’s also the lingering assumption that the law only applies to hedge fund billionaires renouncing over brunch in the Bahamas. And sure, that’s part of the origin story. But these days, someone with a paid-off flat in Amsterdam and a well-funded retirement plan might trip the thresholds without realizing they’re even close.

And Then There’s the Accidental Part

Not everyone ignores the exit tax out of arrogance or calculation. Sometimes it just… falls through the cracks.

The rules are dense. What exactly is your business worth on paper? How do you put a value on your employer-sponsored pension in the Netherlands? And what if your accountant forgot to file some obscure disclosure in 2019? Does that make you noncompliant? Possibly. It depends.

On top of that, renunciation isn’t always a clinical financial decision. A lot of people do it because they’re frustrated, or disillusioned, or they don’t want their kids dealing with dual citizenship headaches. In moments like that, it’s easy for taxes to become an afterthought until it turns out they weren’t.

And, let’s be fair, the IRS doesn’t exactly go out of its way to explain this stuff. If your accountant doesn’t specialize in expatriation (most don’t), you might never hear about any of this until you’re already halfway out the door.

What If You Just Ignore It?

Well… you can try, but it probably won’t end well.

If you’re a covered expatriate and don’t file properly, you could face penalties, interest, and some very unpleasant consequences if you ever return to the U.S. or if any U.S.-based family ends up on the receiving end of your estate.

That last bit surprises people. Under something called IRC §2801 (which, yes, sounds like a Star Wars droid), any gifts or inheritances you pass to U.S. citizens could get hit with a 40% tax. Not on income but on the transfer itself. So, imagine your kid inherits your apartment in Paris. Boom! 40% haircut. Not because you were rich, but because the paperwork was wrong.

So, Should You Panic?

No. But should you pay attention? Absolutely.

Most expats will never owe the exit tax. But the tax code doesn’t care about “most.” It cares about details. And if you hit one of the tripwires, even unintentionally, it can cause real damage.

If you’re even casually considering renouncing or handing back a green card, it’s worth sitting down and sorting out where you stand. Especially if your finances aren’t totally straightforward, maybe you’ve got property abroad, a business interest, or some long-ignored retirement account.

Get someone who knows their way around expatriation. Tax professionals from Expat Tax Online are people who’ve actually seen how this plays out.

Because while you may be done with the U.S. tax system, that doesn’t necessarily mean it’s done with you.