In recent years, more Americans have explored the idea of moving abroad. Motivations range from family or cultural ties to political considerations and tax concerns. However, many individuals underestimate the extensive U.S. tax consequences tied to such a move, including income, gift, and estate tax obligations. Unlike most developed nations, the United States taxes its citizens and long-term residents on their worldwide income, regardless of where they live. Even after relocating all activities overseas, U.S. citizens are still required to file annual tax returns (Form 1040) reporting global income. Similarly, green card holders continue to be treated as U.S. tax residents until they formally relinquish their status. This requirement leads many to reconsider expatriation once they learn they must renounce citizenship or surrender their green card to avoid worldwide taxation.

The Exit Tax and Inheritance Considerations

If someone does move forward and formally renounces U.S. citizenship or relinquishes their green card, they may face significant tax hurdles if classified as a “covered expatriate.” This classification can trigger an exit tax as well as a potential future inheritance tax on U.S. beneficiaries. A “covered expatriate” is generally someone who:

• Has an average annual net income tax liability exceeding $206,000 (for 2025 filings) over the five years before expatriation (the “tax liability test”),
• Has a net worth of $2 million or more on the expatriation date (the “net worth test”), or
• Fails to certify five years of tax compliance using Form 8854 (the “certification test”).

Meeting any one of these tests results in covered expatriate status. Covered expatriates are treated as if they sold all worldwide assets the day before expatriation, and must pay tax on any unrealized gains. For 2025, the first $890,000 of gains is excluded, adjusted annually for inflation. However, certain assets — including retirement accounts like IRAs and 401(k) plans — do not benefit from this exclusion and may be subject to deemed distributions or ongoing U.S. withholding taxes. Additionally, U.S. citizens or residents receiving gifts or inheritances from a covered expatriate could face a tax of up to 40% on the transfer.

Continued Taxation on U.S.-Source Income

Relinquishing U.S. citizenship or a green card does not sever all tax ties. Income derived from U.S. sources, such as business income, dividends, or real estate gains, remains subject to U.S. taxation. For instance, rental income from U.S. property or dividends from U.S. corporations will continue to generate U.S. tax obligations for former citizens and residents.

State Tax Challenges

Departing taxpayers should also consider state tax implications. Many states base residency on domicile rather than physical presence alone. Without establishing a new domicile elsewhere, a state may still regard an individual as a resident, taxing worldwide income accordingly. Even after terminating residency, states typically continue to tax income sourced within their borders, including rental income, business earnings, or real estate sales.

Special Tax Treatment for Trusts

Trusts can also face significant tax consequences during expatriation. When a U.S. non-grantor trust becomes a foreign trust, it is treated as if all assets were sold at fair market value on the date of conversion, and tax is due on any resulting gains — with no exclusion threshold. Similar treatment applies when a foreign grantor trust switches to non-grantor status after a grantor loses U.S. residency or citizenship.

Taxes in Your New Country

It’s critical to seek professional tax advice not only in the U.S. but also in your new country of residence. Different jurisdictions may tax U.S. investments, trusts, and business interests in ways that lead to unexpected liabilities. Some countries offer special tax regimes for new residents, while tax treaties between the U.S. and the destination country might help mitigate double taxation on certain income sources.

Careful Planning is Key

Thorough tax planning is essential before making any decisions to leave the U.S. Many individuals are surprised by the potential exit tax and additional foreign tax liabilities. Consulting with experienced advisors in international tax planning can help avoid costly surprises and ensure compliance with both U.S. and foreign tax laws. At Cavanaugh & Co, LLP, our team of Sarasota tax professionals has deep expertise guiding clients through complex global tax issues, including expatriation, exit tax analysis, and cross-border tax compliance. If you’re considering moving abroad, contact us to discuss a tailored strategy that protects your financial future.