Exit Tax

U.S. tax law subjects "covered expatriates" — those meeting certain net-worth or tax-liability thresholds, which are defined by statute and change over time — to a mark-to-market regime on expatriation. In simple terms, the government treats the departing individual as having sold every asset they own at fair market value the day before expatriation, and taxes the resulting hypothetical gain. Specific exclusions and deferral elections exist but are complex; a qualified tax attorney must evaluate any individual's situation.

The exit tax matters to wealthy families because the hypothetical gain on a large investment portfolio, a business interest, or real estate holdings can be substantial even if no cash has actually changed hands. A covered expatriate with a large concentrated position in a privately held company, for instance, could face a significant tax bill at the moment of expatriation regardless of whether the shares are liquid.

A common misconception is that simply moving abroad eliminates U.S. tax obligations. U.S. citizens and long-term permanent residents generally owe U.S. tax on worldwide income regardless of where they live; full exit from the U.S. tax system requires formal renunciation or relinquishment of status, which triggers the exit-tax analysis. Gifts and bequests from covered expatriates to U.S. persons after expatriation may also face a special tax, adding another layer of complexity.