Explanation of US Exit Tax Procedures for Individuals Abandoning American Citizenship in 2025
In the United States, a growing number of high-net-worth individuals (HNWIs) are contemplating expatriation, driven by a combination of economic concerns and changes to tax regulations. This group includes those with a net worth of at least US$2 million, an average annual net US income tax of more than US$206,000 in 2025, or those who have failed to comply with all federal tax obligations over the past five years. These individuals are often referred to as "covered expatriates."
For covered expatriates, an exit tax is imposed upon leaving the country. This one-off tax targets unrealized capital gains on assets that have increased in value but have not been sold. The tax is calculated using Form 8854, a structured method for determining covered expatriate status and the amount of the exit tax owed.
The states offering the most value for wealth management for US citizens renouncing their citizenship are countries with favourable tax systems, low residency requirements, quality healthcare, and proximity to the US. Notable examples include Costa Rica and Panama in Latin America, which have seen a surge in demand due to their affordability and tax advantages. Other options include Caribbean countries offering investment citizenship programs and European countries like Malta, but Latin American options are preferred for their cost-effectiveness and geographic closeness.
Many HNWIs are seeking ways to reduce their net worth or lower their exit tax bill. They can sell their assets before renouncing, potentially benefiting from a lower capital gains tax rate on these sales. Alternatively, they can gift assets to a spouse, children, or a trust to lower their net worth below the US$2 million threshold, potentially reducing the value of deemed dispositions as a covered expatriate.
If a HNWI's income is inconsistent, they could consider timing their renunciation so that their average US income tax bill for the previous five years falls below US$206,000, potentially shedding them of their covered expatriate status. It is also worth noting that in 2025, there is a significant exclusion amount of US$890,000, so HNWIs will only be taxed on unrealized gains above this figure.
For HNWIs who want to leave the United States now but are close to the financial thresholds, retaining their US citizenship or embracing dual citizenship for some time until they're ready to renounce may be a viable option. To make these arrangements, HNWIs must file form W8-CE to the payor of the deferred compensation within 30 days of expatriation.
Renouncing US citizenship is an irreversible decision that brings a fair amount of paperwork, a renunciation fee of US$2,350, and potentially a sizeable expatriation tax bill. Most US citizens wait until they have a second passport before renouncing US citizenship to avoid becoming stateless.
For high-net-worth individuals (HNWIs), preparing to move their lives - lock, stocks and assets - offshore is becoming a necessity. HNWIs can arrange for funds from specific accounts, such as 401(K), 403(B), 457, SEP, Simplified Retirement Accounts, and Restricted Stock Units, to be defined as eligible deferred compensation, with tax deducted at source on future withdrawals. Funds from non-grantor trusts are deducted at source on future withdrawals by default.
Many HNWIs are realizing that the only way to fully escape the IRS and move beyond the reach of FATCA regulations involves renouncing US citizenship. However, this decision is not taken lightly, as it carries significant implications for both the individual and their financial future.
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