Reducing the US Exit Tax: Pre-Departure Planning Strategies for Covered Expatriates

The United States HEART Act exit tax — a deemed disposal of all worldwide assets at fair market value on the date of expatriation — is the primary financial obstacle for high-net-worth US citizens and long-term permanent residents considering renunciation or green card abandonment. For a covered expatriate with substantial assets, the exit tax can easily reach seven or eight figures. It cannot be entirely avoided if you are a covered expatriate, but with proper pre-departure planning it can frequently be materially reduced.

This guide outlines the key mitigation strategies available to covered expatriates before they reach the consular window. It is emphatically not a substitute for qualified US tax advice — the exit tax planning area is complex, fact-specific, and subject to regulatory change — but it provides a framework for understanding what is plannable and why early action matters.

Nothing in this guide constitutes US tax advice. Every covered expatriate's situation is different, and strategies that are appropriate in some circumstances are not appropriate in others. Qualified US tax counsel with international tax and expatriate expertise must be engaged well in advance of any planned expatriation.

Are You a Covered Expatriate?

The exit tax rules apply only to "covered expatriates." An individual who renounces citizenship or abandons a long-term permanent residence is a covered expatriate if they meet any one of three tests:

Income test: Average annual US net income tax liability for the five years preceding expatriation exceeds a threshold (USD 211,000 for 2026, adjusted annually for inflation).

Net worth test: Net worth of USD 2 million or more on the date of expatriation.

Certification test: The individual cannot certify on Form 8854 that they have complied with all US federal tax obligations for the five preceding years.

A person who does not meet any of these three tests is not a covered expatriate and is not subject to the exit tax on their worldwide assets (though they must still file Form 8854 and their final US tax return).

For most HNW individuals contemplating renunciation, the net worth test is the relevant threshold. At USD 2 million or more — a relatively modest bar for many internationally mobile high-net-worth individuals — covered expatriate status applies.

Understanding What the Exit Tax Actually Does

The exit tax does not require the expatriate to sell anything. It is a deemed sale: the IRS treats the individual as having sold all worldwide property at its fair market value the day before the expatriation date, then immediately bought it back at the same price. The deemed gain (fair market value minus tax basis) is taxable in the final US tax year, subject to the exclusion (USD 910,000 for 2026, adjusted for inflation).

Only gains above the exclusion are taxed, and only unrealised gains — the difference between current value and original tax basis — are at issue. Assets with a high tax basis (where the cost close to equals the current value) generate little or no exit tax exposure. Assets with a low tax basis relative to current value (highly appreciated assets) generate the most exposure.

Different asset types are treated differently:

• Most assets: subject to deemed sale
• Deferred compensation (pension plans, stock options not yet settled): separate rules apply, typically involving withholding on future distributions to covered expatriates
• Interests in non-grantor trusts: separate rules apply to future distributions to covered expatriates
• Certain retirement accounts (traditional IRAs): treated as distributed in full and taxed on the full amount (minus basis) in the year of expatriation

Strategy 1: Reduce Net Worth Below the USD 2 Million Threshold (If Applicable)

For individuals whose net worth is modestly above USD 2 million — say, USD 2.5 to USD 3 million — it may be possible to bring net worth below the threshold through legitimate steps: charitable contributions, gifts (within annual exclusion amounts and the lifetime gift tax exemption), or retirement of debt. If net worth can be brought below USD 2 million before the date of expatriation, covered expatriate status under the net worth test may be avoided entirely.

This is a relatively blunt instrument and requires that net worth is genuinely reduced, not merely restructured. The IRS will apply substance-over-form and step-transaction analysis to arrangements designed to artificially depress net worth for exit tax purposes. The strategy is most effective where the individual has a genuine desire to make charitable contributions or gifts that happen also to have the exit-tax benefit.

For individuals with net worth well above USD 2 million, this threshold reduction is not available as a practical strategy and the planning focus shifts to reducing the amount of taxable gain rather than avoiding covered expatriate status.

Strategy 2: Increase Tax Basis in Appreciated Assets

The exit tax applies to unrealised gains — the excess of fair market value over tax basis. Increasing the tax basis of appreciated assets before the expatriation date directly reduces the exit tax.

Selling and rebuying assets. An individual can sell appreciated assets, recognise the gain now as a US person (subject to current income and capital gains tax), and then repurchase the same assets at the new, higher market value. This "realising" of the gain before expatriation establishes a new, higher tax basis. The exit tax on the same assets after the sale-and-rebuy is zero (because the basis equals the current market value).

The benefit of this strategy depends on the rate comparison: if current rates (ordinary income or capital gains) are lower than the exit tax rate that would apply (also capital gains rates, but applied in a potentially less favourable bracket), the strategy reduces total tax. The analysis must model the current tax cost of realising the gain versus the expected exit tax cost.

Elections under IRC Section 1291. For US persons holding PFIC (Passive Foreign Investment Company) interests, making a QEF or mark-to-market election may establish a stepped-up basis that reduces the exit tax.

Retirement of specific appreciated asset categories. Liquidating appreciated real estate prior to expatriation, and accepting the current US capital gains tax, may be more efficient than carrying that real estate into the exit tax calculation — particularly if the real estate is in a jurisdiction where the exit tax treatment would be unfavourable.

Strategy 3: Charitable Giving and Charitable Remainder Trusts

Charitable donations to qualifying US charities reduce the tax base in the year of the donation. For covered expatriates with significant exit tax exposure, maximising charitable giving in the years before expatriation — particularly to donor-advised funds that can be drawn on over time to fund future charitable goals — reduces the net worth going into the exit tax calculation and generates current-year deductions.

A Charitable Remainder Trust (CRT) established before expatriation may allow an appreciated asset to be transferred to the trust, avoiding immediate capital gains recognition while providing an income stream to the donor for a term or life, with the remainder passing to charity. The tax treatment of CRTs for covered expatriates after the expatriation date is complex and requires specialist advice.

Charitable contributions are subject to annual limitations (generally 60% of AGI for cash contributions to public charities, with carry-forward provisions), so planning should begin sufficiently early to allow the full value to be recognised.

Strategy 4: Pension and Retirement Account Planning

US retirement accounts — particularly traditional IRAs — are treated under the exit tax as if fully distributed on the expatriation date, with the full taxable amount subject to tax in the final US return. The exit tax exclusion does not apply to IRAs; the full amount is taxed. This can make a large traditional IRA a significant driver of exit tax.

Roth conversion before expatriation. Converting a traditional IRA to a Roth IRA before the expatriation date triggers ordinary income tax on the conversion amount in the year of conversion, but establishes a fully basis-funded account. Under the exit tax, the Roth IRA is treated as distributed at fair market value — but because a Roth IRA has already been taxed, and assuming qualified distributions are tax-free, the exit tax treatment may be more favourable. The analysis is complex and depends on the individual's rate position in the conversion year.

Drawing down retirement accounts before expatriation. Where the individual is in a period of relatively lower income — or where income averaging strategies can be employed — beginning distributions from retirement accounts before the expatriation date reduces the balance subject to the exit tax, at the cost of paying tax on distributions now. This can be preferable to carrying the full IRA balance into the exit tax if the rate environment is expected to be worse in the exit year.

Strategy 5: Trust Restructuring

Post-expatriation distributions from US non-grantor trusts to covered expatriates are subject to a 30% withholding tax without the benefit of any tax treaty (the US has specific rules preventing covered expatriates from treaty-shopping to reduce this rate). Pre-departure restructuring of trust interests — including considering whether to restructure as a grantor trust, modify the trust's terms regarding distribution timing, or redistribute interests before the expatriation date — can mitigate exposure to this ongoing tax.

Trust restructuring in an international context is particularly complex, as it must satisfy the rules of both US trust law and the laws of any foreign jurisdiction involved. Specialist trust counsel should be involved in any trust restructuring undertaken as part of pre-departure planning.

Strategy 6: Compliance Remediation

Many individuals who have lived abroad for extended periods have gaps in their US tax compliance — unfiled returns, FBAR omissions, unreported foreign financial assets on Form 8938. These gaps do not merely create historical penalties; they prevent the covered expatriate from making the five-year compliance certification on Form 8854. Failure to certify is itself a covered expatriate trigger, and it means the individual cannot certify clear compliance even if their net worth and income tests would not otherwise make them a covered expatriate.

The IRS Streamlined Compliance Procedures provide a route for non-wilful non-compliant taxpayers to come into compliance with reduced penalties. For those who may have had wilful non-compliance, the Voluntary Disclosure Programme offers a path to resolution with certainty. Both procedures should be explored and completed well before the expatriation date — not simultaneously with the renunciation appointment.

Timeline: When to Start Pre-Departure Planning

Given the complexity and the time required to implement pre-departure strategies, planning should commence at least two to three years before the intended expatriation date. Key milestones:

• Three or more years before: identify covered expatriate status; begin compliance remediation if needed; model exit tax under various scenarios
• Two years before: implement major asset basis-raising strategies (sale and rebuy of appreciated assets); begin retirement account drawdown or conversion strategy; establish charitable giving programme
• One year before: finalise asset valuation inputs; complete trust restructuring; confirm compliance certification position; engage advisers in new tax residency jurisdiction
• Six months before: book consular appointment; finalise pre-departure tax planning; model partial-year return for the departure year
• Day of appointment: sign Form DS-4080; note the exact date as the expatriation date for all subsequent tax calculations

How Global Investments Can Help

Global Investments works alongside specialist US tax counsel to support clients through the pre-departure planning process. We do not provide US tax advice, but we coordinate the multi-adviser team, manage the planning timeline, and ensure that the strategy is coherent across the US tax, international tax, and citizenship dimensions.

We also assist clients in structuring the new tax residency arrangement that follows expatriation, working with tax advisers in the receiving jurisdiction to ensure that the transition to a new tax home is clean and well-documented.

If you are considering US citizenship renunciation and would like to understand how to approach the pre-departure tax planning, contact our international team for a confidential initial discussion.

This guide is for general educational information only. US exit tax rules are highly complex, fact-specific, and subject to change. Nothing in this guide constitutes US tax advice. Independent advice from a US-qualified tax practitioner with international tax and expatriate expertise is essential before taking any action.