U.S. Exit Tax: How It’s Calculated for Expats

For U.S. citizens living in the Netherlands, renouncing your U.S. citizenship or giving up your green card is a significant decision. However, before you take this step, it’s essential to understand the U.S. Exit Tax. This guide explains what the exit tax is, how it works, and how to determine if it applies to you.

What Is the U.S. Exit Tax?

The U.S. Exit Tax applies to certain U.S. citizens and long-term green card holders who choose to expatriate. Its purpose is to ensure that unrealized gains and untaxed assets are accounted for before an individual leaves the U.S. tax system.

Here’s how it works: the IRS treats you as if you sold all your worldwide assets the day before you expatriate. Even though no actual sale takes place, you may be required to pay tax on the gains those assets have accumulated over time. This can include real estate, investment portfolios, business interests, and certain retirement accounts.

In short, the exit tax is the U.S. government’s way of settling outstanding tax obligations before you cut formal tax ties with the country.

Who Is Subject to the Exit Tax?

Not all U.S. citizens or green card holders are subject to the exit tax. The law identifies “covered expatriates”.

You are considered a covered expatriate if you meet any of the following:

• Net Worth Test: Your net worth is $2 million or more at the time of expatriation.
• Tax Liability Test: Your average annual U.S. tax liability over the past five years exceeds $206,000 (as of 2025; this amount is adjusted for inflation each year).
• Compliance Test: You have failed to file all required U.S. tax returns and information reports for the five years before expatriation.

Some people may be exempt from the exit tax. This includes dual citizens at birth and minors who gave up U.S. citizenship before age 18½, provided additional conditions are met.

How Is the Exit Tax Calculated? 

The exit tax applies to the unrealized gain on your worldwide assets as if you sold them the day before giving up your U.S. citizenship or green card. The tax is calculated as follows:

1. Determine Unrealized Gains: Calculate the current market value of your assets and subtract what you originally paid to determine your unrealized gains.
2. Exclusion Amount: The first $890,000 of unrealized gains (as of 2025) is not taxed. Any gains above this amount are taxed at the capital gains rate.
3. Special Rules for Retirement Accounts: Some assets, like IRAs or pensions, are treated differently. For instance, IRAs are treated as if you withdrew the full amount. This means you may owe income tax on it.

Common Assets Subject to the Exit Tax 

The exit tax applies to a wide range of assets, including:

• Real estate: Property in the Netherlands or elsewhere.
• Investments: Stocks, bonds, mutual funds, and ETFs.
• Business interests: Ownership in corporations, partnerships, or your own business.
• Personal property: Art, jewelry or other high-value items.
• Retirement accounts: U.S.-based or foreign pensions and retirement savings.

Each asset type may have specific rules for valuation and taxation. The calculations can get complicated. BNC Tax & Accounting can help you calculate your unrealized gains for the exit tax. 

U.S. Exit Tax – Form 8854

If you are subject to the exit tax, you must file Form 8854: Initial and Annual Expatriation Statement with the IRS. This form requires detailed information about your assets, liabilities, and income. 

Failing to comply with the exit tax rules can result in serious consequences. You might face penalties for filing late or incorrectly. If you don’t properly give up your U.S. citizenship, the IRS could still tax you as a citizen. In some cases, you could even be denied entry to the U.S. due to tax-related issues.

Avoiding or Minimizing the U.S. exit tax  

It’s important to understand that not everyone has to pay the U.S. exit tax. In fact, many expats won’t be affected as only those meeting the specific criteria are considered. 

If you do qualify as a covered expatriate, you are able to change that and avoid the U.S. exit tax. For example, you can reduce your net worth by gifting or distributing your assets between yourself and your spouse. 

Of course, only use financial planning strategies that are 100% legal. Experienced expat tax professionals can help you explore your options and ensure compliance.

Navigate Your Personal Tax Situation with BNC Tax & Accounting

BNC specializes in tax preparation and planning for U.S. citizens living abroad. This includes how foreign income, businesses or rental properties affect your federal and state tax liability. We also advise clients how to use tax benefits to their advantage.

If you have questions or concerns about your taxes, book your free 15 minute call here. You will have the opportunity to speak with a fellow expat who can guide you towards tax compliance.