(What You Must Know Before Giving Up Your Green Card)
For many green card holders, leaving the United States feels like the natural next chapter of life. Career opportunities abroad, retirement, family obligations, or lifestyle choices often drive the decision. What most people do not expect is that giving up a green card can trigger a significant U.S. tax bill, sometimes reaching hundreds of thousands—or even millions—of dollars.
This tax is commonly known as the U.S. exit tax. It is not a penalty in name, but for many it feels like one. Under U.S. tax law, certain individuals who give up long-term U.S. residency are treated as if they sold all of their worldwide assets the day before expatriation—and are taxed accordingly.
The good news is this:
The exit tax is not inevitable.
With proper understanding and advance planning, many green card holders can legally avoid it or substantially reduce their exposure.
This article explains the three primary legal pathways used to avoid the U.S. exit tax and highlights the common traps that cause well-intentioned individuals to fall into it.
The exit tax is governed primarily by Internal Revenue Code Section 877A. It applies to individuals who are classified as covered expatriates at the time they relinquish their green card or long-term residency.
The tax regime is based on a simple but harsh concept:
If you benefited from long-term residence in the U.S., the government wants to tax the unrealized appreciation in your assets before you leave.
However, not every green card holder who leaves the U.S. is subject to this tax. Whether the exit tax applies depends on status, timing, compliance history, and asset composition.
The simplest way to avoid the exit tax is also the most overlooked:
do not become a “long-term resident” in the first place.
A green card holder becomes a long-term resident (LTR) if they hold a green card in at least eight U.S. tax years for the last fifteen years. Importantly:
For example, obtaining a green card in December still counts as a full tax year.
Years six through eight are particularly risky. Many individuals keep their green card “just in case” without realizing they are approaching the threshold that permanently changes their tax exposure.
Once you cross into long-term resident status, you no longer have the option of avoiding the exit tax simply by giving up the green card. At that point, the analysis shifts to whether you become a covered expatriate.
If you are already a long-term resident—or cannot avoid becoming one—the next critical question is whether you qualify as a covered expatriate.
The IRS uses three tests. Failing any one of them results in covered expatriate status.
If your worldwide net worth exceeds $2 million on the date of expatriation, you fail this test.
This calculation includes:
The threshold is not indexed for inflation, meaning more people cross it every year.
If your average U.S. income tax liability over the prior five years exceeds an inflation-adjusted threshold, you fail this test.
This is not about income—it is about tax paid. Individuals with high compensation, equity events, or significant investment income often fail this test unexpectedly.
This test asks whether you have been fully compliant with U.S. tax filing obligations for the prior five years.
Even unintentional mistakes can cause failure:
Many people who assume they are “below the radar” become covered expatriates solely due to compliance gaps.
If you are a covered expatriate, all is not necessarily lost. The exit tax includes an important mitigating feature: an annual exclusion for unrealized gain.
Covered expatriates are treated as if they sold most of their worldwide assets the day before expatriation. The IRS then taxes the net unrealized gain, after applying an exclusion amount.
For 2026, the exclusion amount is $910,000 (indexed annually).
This is:
Appreciation beyond this amount is subject to U.S. tax.
Appreciated assets can exhaust the exclusion faster than expected:
Once the exclusion is used up, the remaining unrealized gain becomes taxable immediately.
Certain asset categories are frequently misunderstood and often cause unexpected exit-tax exposure:
These assets are not “bad,” but they are highly sensitive to timing and classification under exit-tax rules. Planning errors involving these assets are common—even among individuals advised by experienced professionals.
Trusts deserve special attention in exit-tax planning.
If a covered expatriate is a beneficiary of a nongrantor trust, distributions after expatriation may be subject to a permanent 30% U.S. withholding tax.
This rule applies regardless of:
Many individuals discover this exposure only after expatriation, when the planning window has already closed.
One of the most important lessons in exit-tax planning is this:
What works one year before expatriation may fail six months later.
Seemingly small changes can have major consequences:
Exit tax planning is not something that can be fixed retroactively. Once expatriation occurs, the rules are largely locked in.
Online articles, forums, and videos are useful for education—but they are not substitutes for individualized analysis. Exit tax outcomes depend on:
Relying on generalized information often leads to irreversible mistakes.
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This article is provided for educational and informational purposes only and does not constitute legal advice or tax advice. The application of U.S. tax laws, including the exit tax under Internal Revenue Code Section 877A, depends on individual facts and circumstances and may change based on future legislation, regulations, or administrative guidance. Reading this article does not create an attorney-client relationship. You should consult a qualified U.S. international tax professional before making decisions related to expatriation, exit tax planning, or compliance matters.