U.S. Expatriation & The U.S. Exit Tax

“Kathleen, I have recently learned that if a U.S. citizen leaves the country to become an expat that the Fed will levy a 50% tax on his assets. Is that true?”

–William W., United States


First, a note about the word “expat.” We (and most of the publishing world that covers these topics) use this term loosely. In the strictest sense, “expat” is short for “expatriation,” and it means giving up your citizenship. That’s an option, though an extreme one.

Just moving overseas (leaving the United States or wherever happens to be your home country and relocating to another one) doesn’t require you to give up your citizenship. And therefore doesn’t amount to expatriation, not legally. When most people (including us) refer to “expats,” this is what we mean–people living outside their countries of birth. It’s a designation to do with residency, not citizenship.

That said, again, it is possible to expatriate in the legal sense. This requires you to renounce your U.S. citizenship formally. This is not an easy thing and can’t be accomplished by accident, by the way. There’s no worry that you might give up your U.S. citizenship without meaning to.

If you ever did decide to expatriate legally, then, yes, you’d be liable for an “exit” tax, but it isn’t 50% of your assets. The rough guideline is this: If you have a net worth of US$2 million or more, the IRS taxes you on phantom capital gains based on the value of your assets on the date you give up your citizenship. In other words, for the purposes of figuring the exit tax, the IRS acts as though you sold everything the day you renounced. This allows them to calculate the capital gains taxes you would have paid had you actually sold off all your assets while still a U.S. citizen.