Understanding the US Exit Taxes for Australian Expats: The HEART Act of 2008

As globalisation and cross-border mobility increase, more Australians Expats are living and working in the United States. But what many don’t realise until it's too late is that exiting the US tax system as a long-term resident or a US citizen comes with strings attached, namely the dreaded “exit tax”. This blog post breaks down US Exit Taxes for Australian Expats and what they need to know. Particularly, if they fall under the category of a "covered expatriate" under the HEART Act of 2008.

What is the HEART Act?

The HEART Act (Heroes Earnings Assistance and Relief Tax Act of 2008) was introduced in 2008 to prevent high-net-worth individuals from avoiding future US taxes by simply renouncing their status. It includes provisions aimed at ensuring that individuals who renounce their US citizenship or give up their green card (after long-term residence) pay a final tax on unrealised gains. In short, it's the US government's way of making sure you pay your dues before walking out the door.

For Australian Expats who have spent significant time in the US, especially those with a green card or dual citizenship, understanding these rules is critical.

Who is subject to the Exit Tax?

The tax applies to those considered “covered expatriates”; a term defined in IRC Section 877A. You are considered a covered expatriate if you meet any of the following three criteria at the time of expatriation:

1. Net Worth Test: Your net worth is $2 million USD or more on the date of expatriation. This includes everything you own globally.

2. Tax Liability Test: Your average annual net US income tax liability for the five years prior exceeds $201,000 (for 2024, indexed annually).

3. Certification Test: You fail to certify that you complied with all US federal tax obligations for the five years preceding your expatriation using Form 8854. If you don't file this form, the IRS may automatically consider you a covered expatriate.

If you satisfy any one of these tests, you are classified as a covered expatriate and potentially subject to the exit tax.

What is the Exit Tax?

The exit tax is essentially a mark-to-market tax. This means the US Internal Revenue Service (IRS)  treats all your worldwide assets as if they were sold the day before you expatriate, even if you haven’t actually sold anything. You are then taxed on the unrealised capital gains above a certain exclusion amount. For 2024, the exclusion amount is $866,000. Anything above that is taxed at standard capital gains rates.

This includes gains from:

• Real estate (both US and foreign, including Australian property)

• Investment portfolios

• Superannuation (more on this below)

• Interests in private businesses

  
  

Not all assets follow the same rules. For example, some US tax-deferred accounts (IRAs, 401ks) and interests in non-grantor trusts may be taxed under different methods, with their own timing and withholding rules.

Learn more about how Australian Expats can move US retirement accounts to Australia.

What about green card holders?

If you’ve held a green card for at least 8 of the last 15 years, you’re subject to the covered expatriate rules. Whether or not you owe exit tax depends on the three tests outlined earlier. For those on common temporary visas issued to Australian Expats, such as the E-3 Specialty visa or L1 Intra-Company Transfer visa (list not exhaustive), fortunately, you are not captured as a covered expatriate.

How does this affect Australian Expats?

If you’re an Australian Expat with significant assets, whether earned in the US or back home in Australia, you could be caught in the exit tax net when you give up your green card or US citizenship. Here’s where US Exit Taxes for Australian Expats gets tricky:

• Superannuation and SMSFs: US tax treatment of Australian superannuation (including SMSFs) is complex. The IRS can treat superannuation accounts as foreign grantor trusts, meaning the account may be fully includible in your worldwide assets for the purpose of calculating exit tax. In practice, this means unrealised gains in your super could be taxed even though it’s considered a retirement account in Australia.

• Australian Real Estate: Even if your property is located in Australia, the IRS may include the unrealised gain in your US tax calculation. There’s no protection from capital gains simply because the asset is abroad.

• Tax Treaties: Many Australians assume the US-Australia Tax Treaty will override these rules. Unfortunately, tax treaties generally don’t apply to the exit tax, since it’s considered a final tax on individuals giving up US status, rather than a standard income tax.

Planning Ahead

If you’re nearing the threshold of becoming a covered expatriate, early tax planning can save you a significant amount. Timing is also critical in mitigating US Exit Taxes for Australian Expats. If your average tax liability is trending downward, delaying your expatriation could help you fall below the threshold. But if you're expecting a large inheritance or asset sale, leaving before that event may be the smarter move.

Consider the following strategies:

• Pre-expatriation gifting: Gifting assets before expatriation may help reduce your net worth below the $2 million threshold.

• Spousal transfers: If only one spouse qualifies as a covered expatriate, shifting certain assets may help mitigate exposure.

• Asset restructuring: Certain assets may be restructured or disposed of before expatriation to reduce unrealised gains.

• Tax compliance: Ensure all US tax filings are up to date to pass the Certification Test. Failing to file or correct past tax returns is one of the most common reasons people become covered expatriates. Make sure you're fully compliant before submitting Form 8854.

Explore some key considerations for Australian Expats repatriating to Australia.

Final Thoughts

US Exit Taxes for Australian Expats are one of the most complex and punitive aspects of the US tax code, and it doesn’t discriminate based on where your assets are located. For Australians Expats who’ve lived in the US for years and are now looking to return home or cut tax ties with the US, understanding your status under the HEART Act is essential.

Before taking any action, speak with a cross-border Tax Adviser who understands both the US and Australian tax systems. The financial stakes are high, but with the right planning, you can make your transition back to Australia smoother and less costly.

If you're an Australian expat worried about exit taxes or want to assess your status as a covered expatriate, reach out for a consultation. A proactive approach can save you hundreds of thousands in unexpected taxes.

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 below link:

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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.