Navigating the Covered Expatriate Rules for Australian Expats Leaving the US

Australian professionals and families often spend years building careers and financial lives in the United States. When the time comes to return home or move elsewhere, many discover that the US imposes an exit tax regime that can significantly affect long-term wealth. These rules were strengthened under the HEART Act of 2008 and apply to anyone classified as a covered expatriate.

Understanding who is a covered expatriate and how these provisions work is essential for Australians preparing to give up their US green card or US citizenship. Careful planning can often reduce or even eliminate unexpected tax exposure. In this blog, we explore the covered expatriate rules for Australian Expats and how they shape your financial exit strategy.

It is worth noting that the covered expatriate rules do not apply to those Australian Expats leaving the US with a temporary visa, such as the E-3, L, or H-1B (list not exhaustive).

The Three Tests That Determine a Covered Expatriate

The HEART Act outlines three distinct tests that determine whether someone becomes a covered expatriate. Australian nationals considering giving up a green card or US citizenship should understand each test clearly because meeting any one of the tests could trigger the exit tax regime.

1)      The Net Worth Test

An individual is classified as a covered expatriate if their net worth is USD $2 million or more on the date of expatriation. Net worth refers to the fair market value of all your global assets reduced by your liabilities. This includes property in Australia, superannuation balances, investment accounts and business interests.

For Australian Expats who have built wealth over several years abroad or who own significant assets back home, it is common to cross this threshold unintentionally. Understanding how each asset is valued under US rules is critical because the net worth test is one of the most common triggers under the covered expatriate rules for Australian Expats.

2)      The Tax Liability Test

An individual also becomes a covered expatriate if their average annual US income tax liability over the five years preceding expatriation exceeds an indexed threshold. For 2025, the current threshold for the tax liability test is $206,000. The threshold is adjusted annually for inflation.

This test focuses on your actual tax paid rather than your income level. It means that Australians working in high-income roles in the United States or receiving bonuses or vested stock over several years may exceed the limit even if their net worth is below the $2 million benchmark. Understanding your historical tax filings helps ensure you do not accidentally meet this test under the covered expatriate rules for Australian Expats.

3)      The Certification Test

The final test captures individuals who cannot certify that they have met all US tax filing obligations for the preceding five tax years. This test is often overlooked, but it is one of the most impactful.

Certification requires a formal declaration on Form 8854 confirming that every required return has been filed and that all US tax liabilities have been paid. If returns are missing, incomplete, or incorrect, you may automatically become a covered expatriate regardless of your income or wealth.

For Australian Expats who have lived in multiple countries or who maintain complex asset structures, ensuring complete compliance is essential when navigating the covered expatriate rules for Australian Expats.

How the Exit Tax Works

If you are deemed a covered expatriate, the US calculates unrealised gains across all of your assets as if everything were sold at fair market value. A portion of these gains is excluded through an annual indexed exemption amount. For 2025, the annual indexed exclusion (i.e. the “exemption amount”) under the covered expatriate exit tax is US $890,000. Any remaining gain is taxed at capital gains rates.

This can include investment portfolios, properties, business interests and, in some cases, deferred compensation arrangements. Even assets held solely in Australia are included. The covered expatriate rules for Australian Expats, therefore, can trigger significant tax liabilities at the point of expatriation.

How the Rules Affect Green Card Holders

The covered expatriate rules for Australian Expats apply to long-term US green card holders. Anyone who has held a green card for at least eight of the past fifteen years is treated as a US citizen for exit tax purposes. This means that giving up a green card any time after the eighth year can trigger the mark-to-market tax on worldwide assets if you meet the net worth, tax liability, or certification tests.

Special Impact on Australian Expats

Australians often maintain a mix of superannuation, Australian property and US-based retirement accounts. Each of these can be affected differently under the covered expatriate rules.

Superannuation is a particular challenge because the United States does not automatically recognise it as a US-qualified retirement account. This can mean that the theoretical gain inside a superannuation fund may be included in the exit tax calculation. Understanding this nuance is vital for anyone applying the covered expatriate rules for Australian Expats to their circumstances.

US retirement accounts, such as 401k and IRA balances, are treated separately. They are not usually part of the mark-to-market calculation. Instead, they are subject to special withholding rules. This can still create substantial tax exposure after expatriation.

Planning Before You Leave the United States

Before giving up a green card or citizenship, it is essential to review your global balance sheet and confirm whether you would be classified as a covered expatriate. Reducing your net worth through legitimate planning, confirming full US tax compliance and managing investment gains can make a meaningful difference.

Some individuals restructure assets or accelerate tax-compliant reporting in the years leading up to expatriation. Others coordinate timing to reduce income tests. These strategies require careful analysis because the covered expatriate rules for Australian Expats are complex and highly technical.

Why Professional Advice Matters

The exit tax regime is one of the most intricate areas of cross-border tax. Working with financial and tax advisers who understand both jurisdictions helps ensure that you do not trigger unnecessary exit tax and that your financial transition back to Australia is smooth. A proactive approach can protect retirement savings and long-term wealth.

Even if you believe you will not be classified as a covered expatriate, it is still wise to undergo a thorough review. The financial impact of getting it wrong can be substantial and difficult to reverse.

Final Thoughts

The covered expatriate rules for Australian Expats can be demanding, but they do not need to derail your plans to leave the United States. With early preparation, clear documentation and coordinated professional guidance, you can manage your obligations and protect your financial future.

Understanding the HEART Act and how the exit tax applies is the first step. Taking action well before expatriation is the next step.

Runway Wealth Management is the trusted Financial Adviser to the Australian Expat community. Our tailored advice is backed by expertise, education and experience, which allows us to be at the forefront of Australian Expat Financial Planning.

If you would like to speak to one of our Expat Financial Advisers about this blog or if you have other queries, we would be more than happy to speak with you. Feel free to send us an enquiry through the ‘Contact Us’ tab provided in the link below:

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General Advice Disclaimer: The information contained herein is of a general nature only and does not constitute personal advice. You should not act on any recommendation without considering your personal needs, circumstances, and objectives. We recommend you obtain professional financial advice specific to your circumstances.