US Departure Tax Explanation: A Handbook for Individuals Abandoning American Nationality in 2025
In recent years, a significant interest in acquiring a second citizenship and leaving the United States has increased among high-net-worth individuals (HNWIs), entrepreneurs, and certain political figures. This trend is driven by a desire for greater global mobility, tax benefits, or to avoid political uncertainties.
One of the key factors driving this shift is the potential financial implications of renouncing US citizenship. Renouncing US citizenship could potentially result in a sizeable expatriation tax bill, but handled strategically, the financial penalties can be minimized or even avoided.
Form 8854, provided by the Internal Revenue Service (IRS), offers a structured way to calculate whether you qualify as a covered expatriate and how much you owe for your exit tax. To avoid being classified as a covered expatriate, one strategy is to ensure your average US income tax bill for the previous five years falls below $206,000. Another is to lower your net worth below the US$2 million threshold, which can be achieved by gifting your assets to a spouse, your children, or a trust.
Unrealised gains, the increase in value of an asset that has not yet been sold, apply to investments like stocks, real estate, or other assets that have appreciated in value but remain unsold. In 2025, there is a significant exclusion amount of US$890,000, so you'll only be taxed on unrealised gains above this figure.
For HNWIs, renouncing US citizenship is becoming a necessity. High-net-worth individuals can arrange for funds from specific accounts (401(K), 403(B), 457, SEP, Simplified Retirement Accounts, and Restricted Stock Units) to be defined as eligible deferred compensation, so tax is deducted at source on future withdrawals. All funds from non-grantor trusts are deducted at source on future withdrawals by default.
It's important to note that immigration enquiries have surged after Donald Trump's 2024 re-election, with many others being weary of the sharp political division and social unrest. Some US citizens are unsettled by the incoming administration's economic agenda, while a sizeable group of citizens are fed up with the burden of the US tax system.
If you're considering leaving the United States now, you may choose to retain your US citizenship or even embrace dual citizenship for some time until you're ready to renounce. Renouncing US citizenship involves a renunciation fee of US$2,350. Any donations that exceed the annual limit of US$19,000 per person per year will be subject to gift tax, and any assets given away in your final year as a US citizen are still considered when calculating exit tax, so you'll need to wait an additional year after giving your assets away before expatriating if you want these donated assets to be subtracted from your exit tax calculations.
More Americans are planning to leave the United States than ever before, with the wealthiest citizens leading the charge. As the political and economic landscape continues to evolve, it's likely that the trend of US citizenship renunciation will continue to grow.
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