US Exit Tax and Green Card Relinquishment

The Core Idea Behind the US Exit Tax

At a high level, the US exit tax regime exists to address one concern:

What happens when someone with substantial ties to the US permanently leaves the US tax system?

From a policy perspective, the US treats certain long-term residents as having built wealth under the US tax framework, even if they are not citizens.

When those individuals formally exit, the US applies special rules to determine:

• whether unrealised gains should be recognised,
• whether deferred tax items should be addressed,
• whether ongoing reporting obligations remain.

This regime is not a penalty for leaving. It is a framework designed to reconcile long-term tax exposure at the point of exit.

Who the Exit Tax Framework Can Apply To

The exit tax framework can apply to two broad groups:

1. US citizens who relinquish citizenship, and
2. Long-term lawful permanent residents (green card holders) who formally give up their status.

This article focuses primarily on green card holders, as that is where most misunderstandings occur.

What Counts as a “Long-Term” Green Card Holder

For exit tax purposes, a green card holder is generally considered long-term if they have held lawful permanent resident status for:

• 8 out of the last 15 tax years

Important nuances:

• Partial years can count.
• Certain treaty elections can affect counting.
• Immigration status alone does not tell the full story.
• Tax filings and elections matter.

Many individuals are unaware they have crossed this threshold.

Leaving the US vs Relinquishing a Green Card

A critical distinction:

Leaving the U.S.

• You move abroad.
• You stop living or working in the U.S.
• You may still hold a green card.
• You may still be treated as a US tax resident.

Relinquishing a green card

• You formally give up lawful permanent resident status.
• You may trigger expatriation rules.
• You may cease being a US tax resident.
• Special tax consequences may arise.

The exit tax regime is tied to formal relinquishment, not physical departure.

What Is a “Covered Expatriate”?

Not everyone who relinquishes residency is subject to exit tax treatment. The rules focus on whether someone is classified as a covered expatriate. At a high level, covered expatriate status may depend on:

• net worth thresholds,
• average annual US tax liability over prior years,
• compliance history with US tax filings.

These thresholds are defined in US law and may change over time. Meeting any one of the criteria can result in covered expatriate classification.

Why Compliance History Matters

One of the most overlooked aspects of the exit framework is tax compliance history.

Individuals who:

• have not filed required US returns,
• have missing international reporting,
• have unresolved compliance issues,

may still be treated as covered expatriates regardless of asset levels.

This is why exit considerations often involve:

• reviewing past filings,
• understanding reporting obligations,
• correcting issues before formal exit.

This is not about optimisation - it is about accuracy and completeness.

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Conceptual Overview of the “Mark-to-Market” Rule

For individuals classified as covered expatriates, US law may apply a mark-to-market concept at exit.

Conceptually:

• certain assets are treated as if sold at fair market value,
• unrealised gains may be recognised,
• exclusions and thresholds may apply,
• specific asset categories are treated differently.

This is a conceptual deemed sale, not an actual liquidation. The purpose is to bring certain unrealised gains into the tax system at exit.

Assets Commonly Considered Under Exit Rules

Depending on circumstances, the exit framework may look at:

• investment portfolios,
• business interests,
• real estate,
• partnership interests,
• trusts and deferred compensation,
• retirement accounts (subject to special rules).

Each category has its own treatment. This is where simplistic summaries often break down.

Why Exit Tax Is Often Discovered Too Late

People usually encounter exit tax issues when:

• they begin immigration paperwork,
• they plan to surrender a green card,
• banks or advisers raise questions,
• asset sales are already planned.

By that point:

• planning flexibility may be limited,
• reporting deadlines may be close,
• documentation gaps may exist.

This is why early awareness, not urgency, is the goal.

Why Exit Considerations Are Part of Long-Term Planning

The exit tax framework is not something to “react” to.

It intersects with:

• residency planning,
• asset structuring,
• retirement planning,
• estate planning,
• cross-border family considerations.

For globally mobile individuals, understanding how the US treats entry and exit is as important as understanding ongoing taxation.

How Exit Rules Differ for US Citizens and Green Card Holders

Although US citizens and long-term green card holders can both fall under the expatriation framework, the path into the rules is different.

US citizens

For citizens, the exit tax framework is triggered only when:

• citizenship is formally relinquished, and
• the individual meets the covered expatriate criteria.

Physical departure alone has no effect.

Green card holders

For green card holders, the trigger is:

• formal relinquishment of lawful permanent resident status, and
• meeting the long-term residency threshold (generally 8 of the last 15 years).

Many green card holders are surprised to learn that:

• leaving the US does not end US tax residency, and
• holding a green card while abroad can extend US tax exposure.

This distinction is foundational.

Deferred Compensation and Exit Considerations

Deferred compensation is treated differently under the exit framework.

Examples include:

• certain employer deferred compensation plans,
• stock options,
• non-qualified plans,
• incentive arrangements.

Under the expatriation regime:

• some deferred compensation items may be treated as distributed,
• others may remain subject to withholding when paid,
• classification depends on whether the plan is “eligible” or “ineligible” under US definitions.

This is an area where assumptions often fail.

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Retirement Accounts and Exit Tax Concepts

US retirement accounts are not all treated the same way under exit rules.

Depending on the account type:

• certain retirement accounts may be deemed distributed,
• others may remain subject to withholding when paid,
• special rules may apply to pensions and annuities.

Importantly:

• exit tax rules do not mean assets are lost,
• but they can change the timing and character of taxation.

Retirement planning and exit planning are closely linked.

Trusts and Business Interests Under Exit Rules

Trusts and business ownership add another layer of complexity.

Trusts

Depending on structure:

• trust interests may be valued,
• distributions may be affected,
• ownership classification matters.

Business interests

Exit considerations may look at:

• equity value,
• partnership interests,
• closely held shares,
• valuation assumptions.

Business owners often need to think about exit tax years in advance.

Net Worth and Tax Liability Thresholds

Covered expatriate status may depend on:

• total net worth,
• average US income tax liability over prior years,
• compliance certifications.

These thresholds are defined in law and adjusted periodically.

Important nuance:

• meeting any one criterion can trigger covered expatriate status,
• failing one criterion may avoid classification even with substantial assets.

This is not a simple “wealth = tax” equation.

Certification and Compliance Requirements

To avoid covered expatriate status on compliance grounds, individuals must:

• certify full compliance with US tax obligations for prior years,
• confirm required filings are complete,
• address international reporting obligations.

Failure to certify compliance can independently trigger covered expatriate classification.

This is often overlooked.

Common Misconceptions About the Exit Tax

Some persistent myths include:

• “Only billionaires are affected.”
• “If I leave quietly, nothing happens.”
• “The exit tax applies automatically.”
• “Green card holders are treated differently from citizens.”
• “Exit tax means I lose my assets.”

None of these statements are universally true.

The framework is rule-based, not assumption-based.

Why Timing and Awareness Matter More Than Action

Exit tax exposure is rarely about urgency.

It is about:

• understanding where you sit relative to thresholds,
• understanding residency history,
• understanding asset composition,
• understanding compliance status.

Once exit steps are taken, options narrow.

Why Exit Planning Is Part of a Bigger Picture

Exit considerations interact with:

• retirement planning,
• estate planning,
• investment strategy,
• business succession,
• family wealth planning,
• future residency choices.

Treating exit tax as a standalone issue misses the broader context.

Hypothetical Exit Scenarios

The following scenarios are hypothetical and provided for educational purposes only. They do not represent actual clients or outcomes.

Scenario 1 - Long-Term Green Card Holder Returning Home

An individual held a US green card for more than eight years, lived abroad for several years, and later decides to formally relinquish permanent resident status.

Key considerations:

• The individual may meet the definition of a long-term resident.
• Covered expatriate status depends on net worth, historical US tax liability, and compliance certification.
• Formal relinquishment, not physical departure, triggers exit tax analysis.
• Past filing accuracy becomes highly relevant.

Scenario 2 - Green Card Holder Leaving Before Long-Term Status

An individual held a green card for a shorter period and leaves the US before crossing the long-term residency threshold.

Key considerations:

• Exit tax rules may not apply.
• US tax residency may still need to be addressed in the year of departure.
• Proper documentation of residency status is important.

Scenario 3 - Business Owner Planning International Relocation

A business owner with US and non-US assets considers relinquishing US residency as part of long-term relocation planning.

Key considerations:

• Business interests may be included in exit tax calculations.
• Valuation assumptions can materially affect outcomes.
• Timing relative to liquidity events matters.
• Early awareness provides more flexibility.

Scenario 4 - Compliance-Driven Covered Expatriate Status

An individual with moderate assets but incomplete US tax filings relinquishes a green card.

Key considerations:

• Failure to certify compliance may independently trigger covered expatriate classification.
• Exit tax exposure can arise even without substantial net worth.
• Resolving compliance issues earlier may change outcomes.

Practical Awareness Checklist Before Relinquishing US Residency

Before taking formal steps to exit the US tax system, individuals may wish to review:

• Whether they are classified as a long-term green card holder.
• Their historical US tax filing and reporting compliance.
• Net worth relative to statutory thresholds.
• Average US income tax liability over prior years.
• Types of assets held (investments, businesses, trusts, pensions).
• Whether deferred compensation arrangements exist.
• How retirement accounts are treated under exit rules.
• How exit considerations interact with estate planning.
• Whether professional advice is appropriate before formal action.

This checklist supports awareness and preparation, not decision-making.

How Skybound Wealth USA Assists With Exit-Related Planning

Skybound Wealth USA assists individuals with:

• understanding how US exit tax concepts apply at a high level,
• helping clients map residency history and asset categories,
• integrating exit considerations into long-term retirement planning,
• coordinating discussions with tax and legal professionals where appropriate,
• supporting globally mobile individuals as they reassess residency and future plans,
• ensuring exit-related considerations are aligned with broader financial goals.

Any recommendations depend entirely on individual circumstances.

Next Steps

If you are considering leaving the United States permanently, relinquishing a green card, or reassessing long-term residency, understanding how the US exit tax framework works in advance can reduce uncertainty and incorrect assumptions. You may schedule a discussion with Skybound Wealth USA to explore how these considerations fit into your broader financial planning.

Important Disclosures

This material is provided for general informational purposes only and does not constitute personalised financial, tax, legal, or immigration advice. US expatriation and exit tax rules are complex and may change over time. Application depends on individual circumstances, residency history, asset composition, and compliance status. Hypothetical examples are for illustration only and do not represent actual client outcomes. Past performance does not predict future results.

Skybound Wealth USA, LLC is an SEC-registered investment adviser. Registration does not imply any specific level of skill or training. Please refer to Form ADV Part 2A, Part 2B, and Form CRS for full disclosures.