U.S. expatriation: the tax side of giving up U.S. citizenship or a green card

Renouncing U.S. citizenship or abandoning a long-held green card ends U.S. worldwide taxation — but only after the IRS is satisfied that your final filings are complete and, if you are a covered expatriate, that the exit tax has been addressed. Planning the sequence before you act is what separates a clean exit from a costly one.

Covered expatriate: the trigger

You are generally a covered expatriate if, on the day before expatriation, any of these apply:

• Your average annual U.S. net income tax liability over the prior five years exceeds the inflation-adjusted threshold.
• Your net worth is US$2 million or more.
• You cannot certify full tax compliance for the previous five years.

The third test is the one people overlook: becoming a covered expatriate can be caused simply by having unfiled returns, not by wealth. Catching up on filings before renouncing is therefore the first move.

The exit tax

Covered expatriates are treated as if they sold their worldwide assets at fair market value the day before expatriation (the "mark-to-market" regime), with an exemption amount and deferral elections in limited cases. Tax-deferred accounts (RRSPs, RRIFs, pensions), deferred compensation, and specified tax-deferred assets each have special rules — and an eligible deferred compensation election can avoid immediate tax on Canadian retirement savings.

The required filings

• Past five years of U.S. returns (or streamlined filing to catch up, if non-willful noncompliance).
• Final dual-status 1040 for the year of expatriation.
• Form 8854 (Initial and Annual Expatriation Statement) — filed with the final return, and in some cases annually afterward.
• FBARs where required through the final year.

After expatriation

A former citizen who remains covered can still face U.S. tax on certain future gifts, bequests, or compensation from U.S. sources. Canadians who later inherit from, or receive gifts from, a covered former citizen should understand these rules too.

We handle expatriation engagements end to end: compliance catch-up, covered-status analysis, exit-tax projection, final filings, and Form 8854 — coordinated with the timeline of your consulate appointment.