Renouncing US citizenship or giving up a long-held green card feels like a personal and legal decision — and it is. But it is also a tax event, and for higher-net-worth individuals it can be an expensive one. The US imposes an 'exit tax' on certain people who expatriate, calculated as if they sold everything they own the day before they leave the tax system. The form that ties it all together is Form 8854, and filing it correctly is the only way to cleanly sever your US tax obligations. Skip it, and you are treated as if you never left.
This guide explains who is caught by the exit tax, how the 'covered expatriate' tests work for 2025, what gets taxed, and the filing steps that matter. It is written for the people who most need to plan — those with meaningful assets, US retirement accounts, or years of unfiled returns behind them.
What is the US expatriation (exit) tax?
The expatriation tax under Internal Revenue Code section 877A applies to US citizens who renounce their citizenship and to certain long-term green card holders who give up their status. If you are a 'covered expatriate', the US treats all of your worldwide assets as if they were sold at fair market value on the day before your expatriation date — a 'mark-to-market' deemed sale — and taxes the resulting net unrealised gain. You do not have to actually sell anything; the tax falls on gains that exist only on paper.
The point of the regime is to stop people leaving the US tax net to escape tax on gains that built up while they were American. It is not a penalty for leaving — most people who expatriate are not covered expatriates at all — but for those with significant assets it can crystallise a large tax bill in a single year.
Who is a 'covered expatriate' for 2025?
You are a covered expatriate — and therefore potentially subject to the exit tax — if you expatriate and meet any one of three tests. Meeting just one is enough.
- Net income tax test: your average annual net US income tax for the five years before expatriation is more than $206,000 (the 2025 figure, indexed each year).
- Net worth test: your worldwide net worth is $2 million or more on your expatriation date.
- Certification test: you fail to certify on Form 8854, under penalties of perjury, that you have complied with all US federal tax obligations for the five years before expatriation.
The third test is the one that catches people out. Even someone with modest income and assets becomes a covered expatriate — with all the consequences that follow — simply by being unable to certify five clean years of US tax compliance. For Americans abroad who have drifted out of filing, that makes getting compliant first (often via the IRS Streamlined Filing Procedures) an essential precondition to a clean exit.
How the exit tax is calculated
If you are a covered expatriate, you calculate the net gain on the deemed sale of all your assets — the total of every unrealised gain, offset by unrealised losses. For 2025, that net gain is then reduced by an exclusion of $890,000 (also indexed annually). Only the net gain above $890,000 is actually taxed, at the normal capital-gains rates that would apply to each asset.
So a covered expatriate with $700,000 of net unrealised gain pays no exit tax (it is within the exclusion), while someone with $3 million of net gain is taxed on roughly $2.11 million. The exclusion is allocated proportionally across your gain, and the tax is reported in the year of expatriation. Certain assets — notably deferred compensation, tax-deferred accounts and interests in non-grantor trusts — are handled under special rules rather than the simple mark-to-market calculation.
Retirement accounts and the exit tax
Tax-deferred accounts such as IRAs and 401(k)s are not marked to market. Instead, a covered expatriate is generally treated as receiving the entire account as a taxable distribution the day before expatriation — without the usual early-withdrawal penalty, but fully taxable as income. This can be one of the largest hidden costs of expatriating for someone with substantial US retirement savings, and it interacts with how those accounts would later be taxed in the UK. Understanding the cross-border treatment of your US 401(k) and IRA as a UK resident is part of deciding whether, and when, to expatriate.
Form 8854: the form you cannot skip
Form 8854, the Initial and Annual Expatriation Statement, is how you formally notify the IRS that you have expatriated and certify your tax compliance. You file it for the year you expatriate, attached to your final US income tax return (a dual-status or Form 1040/1040-NR filing for that year). Critically, your expatriation is not complete for tax purposes until you have both given up your citizenship or green card with the relevant agency and filed Form 8854.
If you do not file Form 8854, you continue to be treated as a US citizen or resident for tax purposes — meaning you remain liable to US tax on your worldwide income — even though you have legally renounced. You are also automatically treated as a covered expatriate for failing the certification test. In other words, the form is what actually ends your US tax life; the embassy appointment alone does not.
Long-term green card holders are caught too
Expatriation is not only about citizenship. A 'long-term resident' — broadly someone who has held a green card in at least 8 of the last 15 tax years — who abandons their green card (or is treated as abandoning it under a treaty) is subject to the same expatriation rules and the same Form 8854. Green card holders who have lived in the UK for years sometimes assume their card has lapsed informally; for tax purposes it has not, and walking away without the proper steps can leave both a US tax tail and an exit-tax exposure.
The covered-expatriate 'inheritance' trap
There is a sting that lasts beyond the exit. Under section 2801, US citizens or residents who later receive a gift or bequest from a covered expatriate can face a special transfer tax at the highest gift/estate tax rate on what they receive. So becoming a covered expatriate can create a future tax cost for your US-based children or family when you eventually pass assets to them. For families with members on both sides of the Atlantic, this is a powerful reason to avoid covered-expatriate status where possible.
Planning to avoid covered-expatriate status
Because the consequences flow entirely from being a covered expatriate, the planning is about staying outside the three tests where you legitimately can. That might mean getting fully compliant for five years before you expatriate so you can certify cleanly, managing your net worth below $2 million through advance gifting where appropriate, or timing the expatriation around your income. None of this is one-size-fits-all, and aggressive structuring carries its own risks, but the difference between being a covered expatriate and not is often the difference between a large bill and none.
- Get five years of US returns and FBARs clean before you expatriate so you can certify compliance.
- Understand your true worldwide net worth — including pensions, property and business interests — against the $2 million line.
- Model the deemed distribution of US retirement accounts before you decide.
- Consider the section 2801 transfer-tax impact on US family members who may inherit from you.
- Take advice on the timing of the expatriation date relative to income and gains.
The dual-status final year
The year you expatriate is usually a 'dual-status' year: you are a US citizen or resident up to your expatriation date and a non-resident afterwards. That means a more complex final return — worldwide income up to the date, then generally only US-source income after it — alongside Form 8854. Getting this final-year filing right matters, because errors here are exactly the kind of thing that can undermine your certification of compliance. It is rarely a DIY exercise.
How this interacts with the UK side
For an American already living in the UK, expatriation changes your US position but not your UK one — you remain UK tax resident and taxable in the UK as before. What changes is that you stop being taxed by the US on your worldwide income going forward, which can simplify life considerably and remove the Foreign Tax Credit versus FEIE juggling that US citizens abroad face every year. But the one-off exit-tax cost, the loss of US citizenship, and the practical consequences (US visa rules, future inheritances) mean it is a decision to weigh carefully, not a quick tax trick.
Is renouncing worth it?
For many ordinary Americans in the UK, the honest answer is that staying compliant is cheaper and simpler than expatriating, especially once you are filing properly and using treaty reliefs. Expatriation tends to make sense for people for whom the ongoing US compliance burden, investment restrictions, or estate-tax exposure genuinely outweigh the cost and finality of leaving. Because the exit tax, Form 8854 and the covered-expatriate consequences are unforgiving of mistakes, anyone seriously considering it should model the numbers with a US/UK tax specialist well before booking an embassy appointment.
