Formally known as the expatriation tax, the exit tax applies when U.S. citizens decide to renounce their citizenship. It may also apply to long-term residents who end their U.S. resident status for tax purposes.

In general, any individual who expatriated after June 2004 will need to complete Form 8854.

For individuals who expatriated after June 2008, the following rules about exit taxes apply:

·        A taxpayer's net worth is at least $2 million on the date they renounce their citizenship or end their long-term residency in the U.S.

o   The IRS calculates someone's net worth by considering all property sold at its fair market value the day before their expatriation date.

·        In the five years before their expatriation, their average net income tax, when adjusted for inflation, was greater than the specified amount.

o   In 2017, for example, the average was greater than $162,000.

o   By 2023 that average had jumped to greater than $190,000.

·        On Form 8854, a taxpayer failed to certify that they have completed their federal tax obligations for the previous five tax years.

Individuals who meet one of those categories are considered covered expatriates. Only covered expatriates are subject to exit taxes.

Exit taxes aren't required to renounce citizenship. Failure to properly file the exit tax, however, can have serious consequences. In 2025, the IRS can levy a $10,000 penalty for those who fail to pay exit taxes.

Expatriation Date

The IRS has guidelines for determining the date that someone renounces their U.S. citizenship or long-term residency. This date can have serious consequences for an exit tax.

To understand why a date can matter, consider how the fair market value for real estate can shift. In 2020, for example, a home's value in January was generally lower than if the same property sold in October. While the pandemic had initially slowed real estate sales that spring, by that fall, low interest rates and a desire for more space at home had sent the real estate market into overdrive.

Someone who owned two homes in the U.S. and renounced their citizenship in January 2020 may not have met the criteria for a covered expatriate. That same person may have suddenly qualified in October, simply because of the rise in real estate prices.

If you have questions about the exit tax, call Senior Partner, Tax Controversy Attorney, and former IRS attorney Brandon A. Keim at (602) 200-7399 or contact him online to discuss your options.