TL;DR (Too Long; Didn't Read)
The 8-Year Rule: If you’ve held your Green Card for parts of 8 out of the last 15 years, you are a "Long-Term Resident" and subject to Exit Tax rules.
The Phantom Sale: The IRS treats your global assets as if they were sold the day before you expatriate (Mark-to-Market tax), even if you don't actually sell them.
The 2-Year Window: You can avoid "Covered Expatriate" status through gift-giving, asset restructuring, and tax filing—but these moves must be made at least 24 months before you hand back your card.
The Symptoms: Is This You?
You’ve spent the last decade building a career in the U.S. tech or finance sector. You’ve climbed the ladder at companies like Google, Meta, or Nvidia. You’ve accumulated a healthy 401(k), a portfolio of RSUs, and perhaps a primary residence in a high-growth market like Austin or the Bay Area.
But now, the "Home" country is calling. Maybe it’s for family, a lower cost of living, or a new venture. You assume that since you are "giving back" your Green Card and leaving the U.S. tax system, your obligations end when you board the plane.
Then, you hear a rumor from a colleague: “If you leave, the IRS takes a percentage of everything you own—even the stuff you bought before you moved to America.”
If you are a Long-Term Resident (LTR) with a net worth over $2M, or if your average annual net income tax for the last five years exceeds a certain threshold, you are about to hit the Exit Tax wall.
The Technical Deep Dive: Mechanics of the "Covered Expatriate"
The U.S. is one of the only countries that imposes an "Exit Tax" (Section 877A) to prevent capital flight. When you relinquish your Green Card, the IRS wants its final "cut" of the wealth you built—or held—while living under the U.S. umbrella.
1. Are You a "Covered Expatriate"?
You aren't just an expatriate; you are a Covered Expatriate (the expensive kind) if you meet any one of these three tests:
The Net Worth Test: Your global net worth is $2,000,000 or more on the date of expatriation (includes equity, real estate, and retirement accounts).
The Tax Liability Test: Your average annual net income tax for the 5 years ending before the date of expatriation is more than a set threshold ($190,000 for 2023; $201,000 for 2024).
The Certification Test: You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding expatriation.
2. The Mark-to-Market Tax
If you are deemed a Covered Expatriate, the IRS uses a "Mark-to-Market" regime. They pretend you sold every asset you own—your house in Bangalore, your stocks in E-Trade, your crypto—at Fair Market Value on the day before you left.
You are taxed on the "unrealized gain." While the IRS provides an exclusion amount ($821,000 for 2024), any gain above that is taxed at capital gains rates.
3. The Deferred Compensation Trap (RSUs and 401ks)
For tech employees, this is the most painful part.
Eligible Deferred Compensation (401k): You don't pay the tax immediately, but a 30% flat tax is withheld when you eventually take distributions. You waive all treaty benefits.
Ineligible Deferred Compensation (Unvested RSUs/Options): These are treated as having been received the day before you leave. You pay ordinary income tax on the full value of unvested equity immediately, even though you can't sell the shares yet.
The Expensive Mistake: Doing Nothing Until the Move
The most common mistake immigrants make is treating the "Green Card Abandonment" (Form I-407) as a simple immigration clerical task.
What happens if you do nothing?
The $2M Cliff: If you are at $2.1M in assets, you could owe hundreds of thousands in taxes. If you had planned ahead to gift $150,000 to a spouse or trust, you would have dropped below the threshold and owed zero Exit Tax.
The Certification Trap: Even if you aren't wealthy, failing to file Form 8854 for the five years prior makes you a "Covered Expatriate" by default. This can lead to a 30% withholding on any future U.S. income for the rest of your life.
The "Situs" Problem: If you leave as a Covered Expatriate and later want to gift money to your U.S. citizen children, they may be hit with a 40% inheritance tax on those gifts.
If you wait until you are booking your movers to look at your tax liability, you have already lost your leverage.
The 2-Year Strategy: Planning Your Escape
To avoid the "Covered" status, you need to "de-bulk" your U.S. tax profile before you hit the 8-year mark, or before your net worth crosses the $2M line.
Year -2: Asset Valuation. Get a formal appraisal of global assets. If you are near the $2M mark, start gifting strategies to non-U.S. person family members.
Year -1: Income Smoothing. If you are close to the Tax Liability threshold, consider deferring bonuses or managing RSU vest schedules (if possible) to keep your 5-year average below the limit.
Year of Exit: Ensure you file a "Dual Status" return. Timing your exit to the start of the year can often minimize the income subject to high U.S. brackets.
The Rally Solution: Don’t Guess Your Exit Cost
Calculating the Exit Tax isn't as simple as Assets - $2M. You have to account for step-up basis rules, treaty elections, and the interplay between U.S. tax and your destination country's tax laws.
Most CPAs charge thousands just to look at an expatriation file, and trying to model the Mark-to-Market tax in an Excel spreadsheet is a recipe for a headache. At Rally, we’ve simplified the path to compliance for the global citizen.
Here is how you can secure your exit strategy today:
Get Your Free AI-Generated Tax Plan: Simply upload your financial documents and residency history to our secure platform. Rally’s engine will analyze your specific situation—tracking your "8-year clock" and estimating your potential Exit Tax exposure—to provide you with a comprehensive, free tax plan.
Consult with an Expert: Once you have your AI-generated roadmap, you can schedule a call with a CPA for a professional consultation. They will help you review the findings, refine your gifting or income-smoothing strategies, and ensure your Form 8854 is ready to be filed perfectly.
Leaving the U.S. should be the start of an exciting new chapter, not a forced liquidation of your life's savings.
Rally Tax is an Authorized IRS e-file Provider and SOC2 Compliant.
Frequently Asked Questions:
1. Does the Exit Tax apply to everyone who leaves the U.S.?
No. The exit tax only applies to "Covered Expatriates." You are only at risk if you have held your Green Card for parts of 8 of the last 15 years (the "Long-Term Resident" test). Even then, you only pay if you meet the wealth threshold ($2M+ net worth), the income tax threshold, or if you fail to certify that you’ve been tax-compliant for the last 5 years.
2. I let my Green Card expire while living abroad. Am I safe?
No. This is a dangerous misconception. From the IRS’s perspective, you remain a U.S. tax resident until you formally relinquish your status by filing Form I-407 and Form 8854. If your card expired three years ago but you haven't filed these forms, the IRS still expects you to report and pay taxes on your worldwide income.
3. Is the $2 million net worth test per person or per couple?
It is per person. If you and your spouse are both Green Card holders, you are each evaluated individually. This is a critical planning opportunity: if one spouse owns $3M in assets and the other owns $500k, shifting assets between spouses (if one is a U.S. citizen) or structured gifting can pull both of you under the $2M "Covered Expatriate" line.
4. How does the IRS know what my house in my home country is worth?
When you file Form 8854, you are required to list the Fair Market Value (FMV) of your global assets. While the IRS doesn't fly an appraiser to your home country immediately, they can request documentation during an audit. If you are a "Covered Expatriate," you must use a "Deemed Sale" approach, meaning you calculate the gain as if you sold the house the day before you left.
5. What if I am tax-compliant but my net worth is over $2 million?
You will be classified as a Covered Expatriate. However, you only owe tax on the gain of your assets, not the total value. The IRS provides a generous exclusion amount ($890,000 for 2025).
Example: If your total unrealized gains across all stocks and property are $1M, you only pay capital gains tax on the amount exceeding the exclusion (roughly $110,000).
6. Can I just "wait out" the 8-year rule?
The 8-year rule is based on tax years, not calendar days. If you arrived in the U.S. in December 2018 and leave in January 2025, you have technically touched 8 tax years (2018, 19, 20, 21, 22, 23, 24, 25). If you are close to the limit, leaving in Year 7 is the single best way to avoid the exit tax entirely.
