This article demystifies who is subject to US exit tax, outlines the criteria defining a ‘Covered Expatriate,’ and provides insights into potential tax implications.

📚 Table of Contents

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• What is Expatriation tax and who does it apply to?
• Does exit tax apply to H-1B visa holders?
  • Which are the visas where exit tax is not applicable apart from H-1B?
  • Can a H-1B visa holder become subject to the exit tax?
• Green Card Holders: Exit Tax May Apply to Lawful Permanent Residents
• Exit Tax Applies if Covered Expatriate for US Citizens
• How is exit tax calculated for different asset classes?
• Can you plan to reduce exit tax when leaving the US?

What is Expatriation tax and who does it apply to?

The US Expatriation Tax or more colloquially exit tax is a way for the US IRS to tax soon-to-be ex-tax residents once before they completely renounce their tax residency and leave the country.

Exit tax does not apply to H1B Visa holders 🎉

This exit tax applies to:

• US Citizens (USC) who have renounced their citizenship
• Long-term tax residents, e.g. Green card (GC) holders, who are no longer tax residents in the US (i.e. have left the country)

In both cases, exit tax applies to anyone who is a Covered Expatriate as per the IRS definition.

In more straightforward language, to be eligible for exit tax, you must fail one or more of the following tests or conditions:

• Net worth test: Having a net worth of $2 million or more on the expatriation date.
• Tax liability test: Having an average annual net income tax liability of more than $201,000 as of 2024 over the previous 5 years.
• Non-compliance test: Failing to certify, using Form 8854, that you have complied with U.S. tax obligations for the last 5 years.

If exit tax applies to you, then for practical purposes you are required to pay a tax calculated as

• selling your worldwide assets at fair market value (FMV) on the day before leaving the US
• pay capital gains tax on these deemed gains exceeding the exemption amount called the statutory exclusion amount ($866,000 in 2024, earlier was $821,000 in 2023)

We will now cover these three cases: Temporary Work Visa i.e. H-1B, Lawful Permanent Residents i.e. Green Card Holders and U.S. Citizens.

Does exit tax apply to H-1B visa holders?

The answer here is the same as this famous line in Shakespeare’s Hamlet Act 3, Scene 3, Line 87

No!

Since H-1B (or similar) visa holders are on temporary work visas and are non-immigrants, no exit tax applies.

Which are the visas where exit tax is not applicable apart from H-1B?

Here is the full list of visas where exit tax is not applicable:

Visa Type	Description	Can Become U.S. Tax Resident?	Notes
B-1/B-2	Business/Tourist	✅ Yes, if present > 183 days (SPT)	Visitors may become tax residents temporarily, but exit tax doesn’t apply
F-1	Student Visa	✅ Temporarily exempt for 5 years, then SPT applies	No exit tax unless they convert to GC
J-1	Exchange Visitor	✅ Exempt for 2 years in many cases	Same as F-1; exit tax only after long-term GC
H-1B	Skilled Worker	✅ Yes, typically resident for tax purposes	Only relevant if transitioned to GC
L-1	Intracompany Transfer	✅ Yes	Common GC pathway, watch for the 8Y rule
O-1	Extraordinary Ability	✅ Yes	No exit tax unless GC acquired
TN (NAFTA)	Canadian/Mexican Professionals	✅ Yes	May be taxed but no expatriation implications
E-1/E-2	Treaty Trader/Investor	✅ Yes	Long stays can make you resident, but no GC = no exit tax
R-1	Religious Worker	✅ Yes	Same as above
K-1	Fiancé(e)	✅ Yes	Converts to GC after marriage, so watch for the 8Y rule

Can a H-1B visa holder become subject to the exit tax?

The IRS defines a “long-term resident” as someone who held a GC for at least 8 of the last 15 tax years, not simply being in the U.S. on a visa.

H1-B visa holders can become exit-tax eligible if and only if both the conditions below are true:

• they take up either a Green Card (passing the long-term resident test) or US Citizenship
• they meet the Covered Expatriate definition after that point

Green Card Holders: Exit Tax May Apply to Lawful Permanent Residents

Green card holders might be subject to exit tax if:

• either you voluntarily abandon your permanent residency (by filing Form I-407) or your GC expires OR
• you meet the “long-term resident” condition by holding a GC for at least 8 of the last 15 tax years

AND you meet the Covered Expatriate rule.

Exit Tax Applies if Covered Expatriate for US Citizens

For US Citizens, the rules are simpler. Exit tax applies automatically if:

• you renounce citizenship AND
• you meet the Covered Expatriate rule

Renouncing citizenship involves submitting Form 8854 to the IRS to report the final tax status.

Here is a summary of these three cases:

Visa Type	Description	Can Become U.S. Tax Resident?	Subject to Exit Tax?	Notes
H-1B/Others	Temporary Work Visa	✅ Yes, typically resident for tax purposes	❌ No	Only relevant if transitioned to GC
Green Card	Permanent Resident	✅ Yes	✅ Yes, if held ≥8 of last 15 years and covered expatriate	Exit tax applies at expatriation if thresholds met
U.S. Citizen	N/A	✅ Always	✅ Yes, if covered expatriate	Full application

How is exit tax calculated for different asset classes?

Exit tax applies to the following assets:

Asset Type	Exit Tax?	Key Tax Treatment
Stocks, ETFs, Mutual Funds	✅ Yes	Mark-to-market, capital gains tax
Real Estate (Primary Home)	✅ Yes	$250K exclusion, capital gains tax
401(k), Traditional IRA	✅ Yes	Fully taxed as ordinary income
Roth IRA	✅ Yes (only earnings)	Tax-free if held 5+ years & >59.5
Employer Pension (🇺🇸)	❌ No	Taxed when received
Employer Pension (Foreign)	✅ Yes	Deemed distributed & taxed
Trust Beneficiary	❌ No	But 30% withholding on future distributions
LLC, Private Business Ownership	✅ Yes	Valued at FMV & taxed as capital gain
Cryptocurrency	✅ Yes	Mark-to-market, capital gains tax

Explaining these exit tax calculation rules:

• Marketable securities like Stocks, ETFs, Mutual Funds and Cryptocurrencies are considered sold at their fair market value (FMV) i.e. mark-to-market rule applies
• Real estate is also considered sold at FMV with primary residence exclusion applicable
• Traditional IRA & 401(k) are treated as if you received a taxable distribution on the full balance on the day before expatriation (income tax applies but no early withdrawal penalty)
• Roth IRA: earnings are taxed. No exit tax if held longer than five years and your age is more than 59½
• Deferred Compensation (Employer Pension, Annuities, etc.) is considered fully taxable if from a non-US plan (“ineligible plan”). “Eligible” plans i.e. from a US company with withholding tax eligibility are taxed in the future via withholding tax
• Trust grantors or beneficiaries are subject to 30% withholding taxes on future distributions
• Private Business Ownership (LLCs, S-Corps, C-Corps): if privately held then the FMV sale rule applies. If an external appraisal is done then half the value is considered sold. Capital gains tax applies here.

If marginal tax rates apply to these exit tax calculations, it can go up to 37%. If capital gains tax applies, then the $866,000 in 2024 threshold applies.

Use our simple calculator to estimate how much exit tax might be due when you leave the US:

Can you plan to reduce exit tax when leaving the US?

NRIs planning to return to India can employ multiple strategies to reduce exit including gifting assets tax-free, reducing assets by paying off loans and legally shifting assets out of the US.

To understand more about how exit tax can be reduced:

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