Why Many U.S. Expats Avoid or Overlook the Exit Tax

Spend enough time in U.S. expat Facebook groups or Reddit threads and you’ll see the usual gripes roll through FATCA, FBARs, the yearly tax maze from abroad. But one thing that barely makes a ripple? The exit tax. Most people either don’t know it exists or figure it’s just another one of those “only for the rich” problems.

That’s not totally wrong, but also not quite right.

So, first, what are we talking about? The exit tax (or more formally, the expatriation tax) kicks in if you renounce your U.S. citizenship, or if you’re a long-term green card holder and give that up. The IRS, in that moment, basically says: “Okay, let’s pretend you sold everything you own yesterday. Now let’s tax the pretend profit.”

There’s a big exclusion (around $890,000 in gains for 2025), but anything above that is taxable. On top of that, you can get labeled a covered expatriate, which sounds ominous, and kind of is. You are one if:

• Your net worth is $2 million or more;
• Your average annual U.S. tax bill for the last five years is $206,000 or above;
• Or you can’t prove you’ve been fully U.S.-tax-compliant for the past five years.

So yeah, most U.S. expats don’t hit those triggers. A teacher in Seoul or a freelance designer in Lisbon probably isn’t sweating a $2 million net worth. But that doesn’t mean they’re totally in the clear, either.

How Some People Dodge It (Legally)

Some expats avoid the exit tax because, well, they just don’t meet the thresholds. That’s the straightforward bit.

Others do some creative, but legal, planning. People with significant assets may spend years gradually gifting money to their kids or even timing their exit during a market downturn. It’s not dodging taxes so much as finessing the numbers. I once saw a case where a couple gave their adult son yearly cash gifts just under the exemption limit until their net worth slipped below $2 million. It was slow and kind of boring, but it worked.

There are also tax treaties and foreign tax credits that soften the blow, depending on where you live. France, Canada, Germany, they tend to have higher local taxes, which can help offset your U.S. liability. But it’s not a clean offset. Pensions, in particular, are often taxed differently by the IRS than they are by the country you’re living in. That part gets messy fast.

Why Most People Don’t See It Coming

Here’s the thing: most people who get hit by the exit tax don’t do it out of defiance, they just don’t know it’s there.

There’s shockingly low awareness. Ask a random U.S. expat about FATCA and you’ll get some kind of reaction. Ask about the exit tax, and you’ll probably just get a confused look. People usually find out halfway through renunciation, often after already making irreversible decisions.

Also, the emotional side is real. A lot of expats renounce because they’re exhausted. They’re over the paperwork, the penalties, the paranoia. They want their kids to be able to open a bank account in Europe without mom or dad’s passport triggering a compliance review. When you’re emotionally done, taxes can feel like background noise. But that’s often when people trip up.

What Happens If You Just… Don’t Deal With It?

Bad news. The IRS doesn’t have a reputation for forgetting things.

If you qualify as a covered expatriate and don’t file the proper paperwork, or worse, don’t pay what you owe, there’s a decent chance it’ll come back to haunt you. With interest. And penalties.

More troubling, there’s a hidden trap: if you’re a covered expatriate, any gifts or inheritances you leave to U.S. citizens (like your kids or grandkids) could be hit with a 40% tax. That’s not a typo. That’s the actual rate. So even if you slip through the cracks, your heirs might end up paying the price.

A Bit of Perspective

Here’s what gets under my skin: this law was pitched as a way to keep billionaires from fleeing the country with their fortunes. That’s fine, in theory. But in practice, it’s often middle-class folks who get tangled up, people who happened to buy property in Amsterdam at the right (or wrong) time, or who’ve saved responsibly for retirement.

If you’re just earning a paycheck overseas and saving modestly, odds are you’ll be okay. But if you own a business, inherited a house, or have pensions spread across countries, it’s time to pay attention. Hiring a professional isn’t some luxury, it’s insurance.

If you’re even considering expatriation, get advice early. A team like Expat Tax Online can walk you through the thresholds, help you plan around them, and save you from spending more than you need to.

So yeah, most expats won’t ever pay the exit tax. But some will, and they’ll never see it coming until it’s too late. Don’t let that be you.