Tax Consequences of Renouncing US Residency

What Happens to Your Taxes When You Give Up a Green Card?

Abandoning US residency is not as simple as returning your green card. For long-term residents, the IRS applies an exit tax - a final reckoning on worldwide assets before you leave the US tax system.

The exit tax applies to long-term residents: those who held a green card for at least 8 of the last 15 calendar years. If you have held a green card for fewer than 8 years, you are generally not subject to the exit tax, though you still have filing obligations for your final year.

Are You a Covered Expatriate?

The severity of the exit tax depends on whether you qualify as a covered expatriate. You are a covered expatriate if any of the following apply:

• Your average annual net income tax for the 5 years before expatriation exceeded $190,000 (2024 threshold, adjusted annually for inflation)
• Your net worth on the day of expatriation was $2 million or more
• You cannot certify that you have been tax-compliant for the past 5 years (by filing Form 8854)

Most people who fail only the certification test can resolve this by getting current on all past filings before expatriating.

The Mark-to-Market Rule

If you are a covered expatriate, the IRS applies a mark-to-market rule on the day before your expatriation date. All your worldwide assets - stocks, real estate, foreign accounts, business interests - are treated as if sold at fair market value on that date.

Any net gain above the exclusion amount ($866,000 in 2024) is included in your income for that year and taxed at applicable capital gains rates. Losses can offset gains, but you cannot carry them forward after expatriation.

Assets not subject to mark-to-market include:

• Eligible deferred compensation (taxed differently, usually via withholding)
• Interests in non-grantor trusts (also taxed differently)
• Specified tax-deferred accounts such as IRAs (taxed as distributions)

Your Final Tax Year: Dual-Status Filing

In the year you abandon residency, you are a dual-status alien:

• Resident period: January 1 through your expatriation date - you report worldwide income
• Nonresident period: from your expatriation date through December 31 - you report only US-source income

Dual-status returns are complex. You cannot use the standard deduction during the nonresident period, and you may not file jointly with a spouse unless they make a special election.

Form 8854: What You Must File

Form 8854 is the cornerstone of expatriation compliance. You file it with your final income tax return. It requires you to:

• Certify 5 years of tax compliance
• List worldwide assets and their fair market value
• Calculate any exit tax owed

Some taxpayers must continue filing Form 8854 for up to 10 years after expatriation if they have deferred compensation items, pension rights, or interests in trusts that continue to pay US-source income.

Practical Steps Before You Leave

State-Level Exit Taxes

A few US states - notably California - have their own exit tax rules that apply when you move out of state, let alone out of the country. If you lived in a high-tax state, review state-level obligations separately.

Know Your Situation Before You Act

The exit tax is one of the most complex areas of US international tax law. Mistakes - including failing to file Form 8854 - carry substantial penalties. Run your 5-minute diagnostic to understand where you stand before making any decisions.