The State Department Cut the Renunciation Fee. The Exit Tax Is What Actually Matters.

On March 13, 2026, the State Department published a Federal Register notice reducing the fee to renounce United States citizenship from twenty-three hundred fifty dollars to four hundred fifty dollars, effective April 13, 2026. For the roughly nine million Americans living abroad, and for the smaller but growing number of people inside the United States who have been thinking seriously about expatriation, the headline sounds like a meaningful break. It is not. The fee reduction is a small win at the door of the building. The building itself is the exit tax, and that building has not changed. If you are considering renouncing United States citizenship and you are focused on the fee, you are focused on the wrong number.

The exit tax sits in Internal Revenue Code section 877A. It imposes a mark-to-market regime on the worldwide assets of certain individuals who give up citizenship or long-term resident status. The mechanism is straightforward to describe and often catastrophic to execute. On the day before expatriation, the expatriate is treated as having sold all of her property at fair market value. Gains above an annually indexed exclusion, which is $910,000 for 2026, are subject to current federal income tax at the rates applicable to the asset class. Capital gain assets are taxed as capital gains. Ordinary income assets are taxed as ordinary income. Deferred compensation and specified tax-deferred accounts have their own rules that can accelerate income in punitive ways. Interests in non-grantor trusts are subject to withholding regimes when distributions eventually reach the expatriate. None of this is optional for a person who meets the statutory tests.

The statutory tests are what determine whether a person is a so-called covered expatriate, and therefore subject to the mark-to-market regime. There are three. The first is the net worth test. A person whose worldwide net worth, computed using estate-tax valuation principles, is two million dollars or more on the date of expatriation is a covered expatriate. The threshold has not been indexed since enactment, so time and asset appreciation have steadily pulled more people over the line. For a professional who has worked a career, owns a home in a coastal market, holds a retirement account, and has built modest investment savings, two million is not a theoretical number. It is where that person actually is.

The second test is the average income tax liability test. A person whose average annual net federal income tax liability for the five taxable years preceding expatriation exceeds the annually indexed threshold is a covered expatriate. That threshold is two hundred eleven thousand dollars for 2026. This test catches high earners even if their net worth is modest, and it is the test most commonly overlooked because people tend to think in terms of wealth rather than recent income. A professional who had several strong earning years leading up to the expatriation date may clear the threshold without realizing it.

The third test is the compliance certification test. A person who cannot certify on Form 8854 that she has been in compliance with all federal tax obligations for the five tax years preceding expatriation is a covered expatriate, regardless of net worth or income. This test is the sleeper. Americans living abroad frequently have complicated compliance histories. Filing returns in two countries, coordinating foreign tax credits, reporting foreign accounts on FBARs and Form 8938, recognizing passive foreign investment company income from local mutual funds, and generally keeping current with United States rules that were built for domestic taxpayers but applied extraterritorially can be extremely difficult. A small gap in the five-year history, even one the individual did not know about, pulls her into covered expatriate status under this test. And the Service takes a strict view of what compliance means.

Form 8854, titled Initial and Annual Expatriation Statement, is where the exit-tax regime actually operates on paper. The form is filed with the individual's final federal tax return for the year of expatriation. It reports the expatriate's worldwide balance sheet as of the day before expatriation. It calculates the mark-to-market gain. It allocates the annual exclusion. It reports any section 877A elections, including the deferral election for certain tax on property held at expatriation, which requires posting adequate security and accruing interest on the deferred tax. And it contains the five-year compliance certification. A failure to file Form 8854 timely is itself enough to trigger covered expatriate status under a fallback provision, even if the individual would not otherwise have met any of the three substantive tests. The statute does not forgive a missed form. Practitioners should also note that the valuations underlying the mark-to-market calculation are not self-certifying. Appraisals, particularly for closely held business interests and illiquid assets, need to be defensible. An understated valuation on Form 8854 invites examination long after the expatriate has moved on to a different life, and the Service has been increasing its scrutiny of expatriation returns in recent years.

For people who have already expatriated without filing properly, the Service has developed a specific remediation path called the Relief Procedures for Certain Former Citizens. The procedures apply to accidental Americans and other individuals whose compliance histories are messy but whose tax liability is modest. To qualify, the former citizen must have a net worth below two million dollars on the expatriation date and an aggregate tax liability of twenty-five thousand dollars or less over the six-year period covered by the procedures. Taxpayers who qualify can file six years of returns, pay any tax due up to the twenty-five thousand dollar ceiling, and secure the compliance certification without penalty. Taxpayers who do not qualify are on the ordinary compliance path, with whatever penalty exposure attaches. The Relief Procedures do not solve the mark-to-market problem. They solve the compliance problem for the subset of cases in which the substantive tax liability is modest.

The practical planning consequence of all this is that the renunciation fee is almost beside the point. A person contemplating expatriation needs to run the exit-tax analysis first. That analysis has three main steps. First, determine whether any of the three covered-expatriate tests are met. The net worth test requires an inventory and valuation exercise. The income test requires a review of the prior five years of returns, which is often revealing. The compliance test requires a careful review of FBARs, Form 8938 filings, PFIC reporting, and any other information-return obligations that might have been missed. Second, if any of the tests are met, calculate the mark-to-market tax. This is where the real numbers come out. For an individual with appreciated real estate, appreciated brokerage accounts, and appreciated interests in closely held businesses, the tax can be transformative. Third, consider whether timing, gifting, or entity restructuring can reduce the exposure before the expatriation date. The best exit-tax planning happens over multiple years, with asset allocations and dispositions structured in advance of the renunciation.

Tax is not the only consideration, and nothing in this piece should be read as legal advice for any particular person. People renounce for many reasons, including family circumstances, professional restrictions, and the administrative burden of remaining in the United States tax system as an expat. Each of those reasons is legitimate, and people have the right to make decisions that are not purely tax-optimized. But a decision made without full visibility into the exit-tax consequences is almost always the wrong decision, regardless of what the fee to obtain the Certificate of Loss of Nationality happens to be in a given year.

Two additional practical points round out the picture. The first concerns children and accidental Americans. A surprisingly large population of people born abroad to United States citizen parents, or born in the United States and raised elsewhere, acquired United States citizenship by operation of law and have lived their lives as citizens of another country. They may not know about FATCA, Form 8938, or PFIC rules. They may not have filed a return in decades, if ever. For this population, the Relief Procedures for Certain Former Citizens were designed almost precisely, and the fee reduction now actually changes the cost-benefit calculus for someone whose substantive tax exposure is minimal. The second point concerns long-term residents, sometimes called long-term green card holders. Section 877A applies to long-term residents who terminate residency, not just to citizens who renounce. A lawful permanent resident who has held that status in eight of the fifteen years preceding expatriation is subject to the same mark-to-market regime. Many people do not realize this, and the practical consequence is that green card planning and expatriation planning often have to be considered together, particularly for executives, investors, and professionals who have spent substantial portions of their careers inside the United States but hold another country's passport as their primary citizenship.

For Americans abroad who are reacting to the fee reduction with relief, the right next step is not to celebrate. It is to sit down with a federal tax practitioner and model the numbers. A two-thousand-dollar fee reduction is useful. It is not the decision. The decision is about what the mark-to-market tax will cost, whether there is a meaningful planning window to reduce it, whether the five-year compliance certification can be delivered honestly, and whether the long-term non-citizen life the client wants is in fact consistent with the client's asset mix and family situation. Those questions deserve real attention, and the State Department's generous moment does not change a single answer.