Expatriation & the Exit Tax

Who the exit tax reaches: citizens and long-term residents, not everyone who moves

The single most common misconception is that moving abroad triggers the exit tax. It does not. The §877A regime applies only to a formal "expatriation": a US citizen who renounces or relinquishes citizenship, or a "long-term resident" (LTR) green card holder who abandons, or has revoked, their lawful permanent resident status. Simply living overseas while keeping your passport or green card changes nothing -- you remain a US person taxed on worldwide income (see the Americans Abroad guide).

A "long-term resident" is a green card holder who held lawful permanent resident status in at least 8 of the prior 15 taxable years under §877(e)(2). If you have held a green card for fewer than 8 of the last 15 years, abandoning it does not subject you to §877A at all. If you cross that 8-year line, abandoning your green card is treated the same as a citizen renouncing -- a potential exit-tax event.

The regime took its current mark-to-market form under the HEART Act of 2008 and applies to expatriations on or after June 17, 2008. (Pre-2008 expatriates fell under the older §877 "alternative tax regime" with a 10-year shadow period; that is now mostly historical.) Your "expatriation date" is the date you renounce before a consular officer (citizens) or the date you abandon or lose LPR status (green card holders) -- that date sets the day-before valuation for everything that follows.

The exit tax applies only to a formal expatriation -- a citizen renouncing or a green card holder who was a lawful permanent resident in 8 of the last 15 years abandoning that status. Living abroad without expatriating does not trigger it. (IRC §877A; IRC §877(e)(2) (long-term resident definition); IRC §7701(b)(6); HEART Act of 2008 (effective for expatriations on or after June 17, 2008))

The three covered-expatriate tests: meet any one and the exit tax applies

Expatriating only triggers the exit tax if you are a "covered expatriate." You are covered if you meet ANY ONE of three tests as of your expatriation date:

1. Net income tax test. Your average annual net US income tax liability for the 5 taxable years ending before expatriation exceeds the inflation-indexed threshold -- $211,000 for 2026. This is your actual federal income tax (not income, not gross), averaged over five years.

2. Net worth test. Your worldwide net worth is $2,000,000 or more on the expatriation date. Critically, this $2 million figure is NOT inflation-indexed and has not changed since 2008, so it catches more people every year as asset values rise. Net worth includes everything -- home equity, retirement accounts, business interests, foreign assets.

3. Compliance certification test. You fail to certify, under penalties of perjury on Form 8854, that you have complied with all US federal tax obligations for the 5 years preceding expatriation. This test is independent of wealth: even a person with modest assets becomes a covered expatriate if they cannot truthfully certify 5 clean years.

Meeting any single test makes you covered. A middle-income retiree with a paid-off house and a healthy 401(k) can easily clear $2 million in net worth and be fully exposed, even though their income never approached the income-tax threshold. Conversely, narrow exceptions exist for certain dual-citizens-at-birth and certain minors who expatriate before age 18.5, provided they also meet a limited-residence test -- those individuals can avoid covered status even above the thresholds.

You are a 'covered expatriate' if you meet any one of three tests: 5-year average net income tax over $211,000 (2026), net worth of $2 million or more (not indexed), or failure to certify 5 years of tax compliance on Form 8854. (IRC §877A(g)(1); IRC §877(a)(2) (net income tax and net worth tests); 2026 income-tax threshold $211,000 per Rev. Proc. 2025-32; net worth $2,000,000 (not indexed))

The mark-to-market deemed sale: you are taxed as if you sold everything

The core of the §877A exit tax is a deemed sale. On the day before your expatriation date, you are treated as having sold all of your worldwide property at its fair market value. You net the gains and losses across all assets, and the resulting net gain is recognized on your final-year return -- as if those sales actually happened.

The net gain is then reduced (but not below zero) by the exclusion amount, which is inflation-indexed: $910,000 for 2026 (it was $866,000 for 2024 and $890,000 for 2025). Only net gain above $910,000 is taxed. Because the deemed sale follows normal character rules, gain on assets you have held long-term is taxed at long-term capital-gains rates (up to 20%), and short-term or ordinary-income assets are taxed accordingly. The 3.8% net investment income tax can also apply to the deemed gain depending on the asset.

A worked feel for the math: a covered expatriate with $2,000,000 of net unrealized gain across their portfolio subtracts the $910,000 exclusion to reach $1,090,000 of taxable gain. If it is all long-term, the federal tax is roughly $1,090,000 x 20% = $218,000, before any NIIT. The exclusion is allocated pro-rata across appreciated assets, and you can make elections that affect timing (see the deferral election below). This is a real, immediate cash tax on paper gains you have not actually sold -- which is why valuation and planning before the expatriation date matter so much.

A covered expatriate is treated as selling all worldwide assets at fair market value the day before expatriation. Net gain above the inflation-indexed exclusion ($910,000 for 2026) is taxed at the normal rates for each asset's character (long-term gains up to 20%). (IRC §877A(a)(1) (mark-to-market deemed sale); IRC §877A(a)(3) (exclusion amount); 2026 exclusion $910,000 per Rev. Proc. 2025-32)

Retirement accounts and deferred compensation: the exclusion does not save them

The mark-to-market rule does not apply uniformly. §877A carves out three special categories that are taxed differently and, importantly, do NOT get the benefit of the $910,000 exclusion:

Specified tax-deferred accounts (IRAs, 401(k)s, HSAs, 529s, Coverdell accounts). These are treated as fully distributed to you the day before expatriation -- the entire balance is deemed received and taxed as ordinary income. The one relief: the 10% early-withdrawal penalty under §72(t) does NOT apply to this deemed distribution. So a covered expatriate with an $800,000 traditional 401(k) recognizes $800,000 of ordinary income in the expatriation year, with no early-withdrawal penalty but at full ordinary rates. The $910,000 mark-to-market exclusion gives no relief here.

Eligible deferred compensation items (typically US-source pensions and nonqualified deferred comp where the payer is a US person and you irrevocably waive any treaty reduction in withholding). These are NOT taxed at expatriation; instead, the payer withholds a flat 30% on each future payment as you receive it.

Ineligible deferred compensation items (foreign plans, or where you do not make the waiver). These are treated as received at present value the day before expatriation and taxed then.

Interests in non-grantor trusts are subject to a 30% withholding tax on future distributions attributable to the covered expatriate's share. The practical effect is that retirement wealth -- often the largest part of a middle-income person's net worth -- is the most exposed and the least shielded by the exclusion.

Tax-deferred accounts (IRA, 401(k)) are deemed fully distributed as ordinary income (but with no 10% early-withdrawal penalty) and get no benefit from the $910,000 exclusion. Eligible deferred comp faces 30% withholding on future payments; ineligible deferred comp is taxed at present value at expatriation. (IRC §877A(c) (exception for specified tax-deferred accounts, eligible/ineligible deferred compensation, and non-grantor trusts); IRC §877A(d), (e), (f))

The §877A(b) deferral election: spreading the cash hit

Because the mark-to-market tax falls due on paper gains, §877A(b) lets a covered expatriate elect to DEFER payment of the exit tax attributable to a particular asset until that asset is actually sold (or until death). The deferral is per-asset -- you can elect it for the illiquid holdings that would otherwise force a fire-sale and pay currently on the liquid ones.

The election comes with strings: interest accrues on the deferred tax at the normal underpayment rate from the original due date, you must provide adequate security (typically a bond or a security agreement acceptable to the IRS), and you must irrevocably waive any treaty right that would reduce US tax on the deferred item. The deferral applies only to the mark-to-market gain -- it does NOT cover the deemed distribution of tax-deferred accounts, which is taxed immediately as ordinary income regardless.

The election is made asset-by-asset on Form 8854. It is most useful for a covered expatriate who is asset-rich but cash-poor -- for example, someone whose net worth is dominated by a private business interest or real estate they do not intend to sell soon. The cost is the running interest charge and the administrative burden of the security arrangement, so model whether the time value of deferral outweighs the interest you will pay.

A covered expatriate can elect to defer the exit tax on a per-asset basis until the asset is sold or death, but interest accrues, adequate security (a bond) is required, and any treaty benefit for that item must be waived. Deferral does not cover the deemed distribution of retirement accounts. (IRC §877A(b) (election to defer payment of tax); security and interest requirements; irrevocable waiver of treaty benefits)

Form 8854 and the final return: the filing that defines everything

Form 8854 (Initial and Annual Expatriation Statement) is the linchpin. Every expatriate -- covered or not -- must file it for the year of expatriation, attached to a final dual-status income tax return (a Form 1040 for the part of the year you were a US person and a Form 1040-NR for the part after). The form is where you certify 5 years of tax compliance, report your net worth and the deemed-sale computation, and make any deferral election.

The certification is the trap. If you cannot truthfully certify under penalties of perjury that you complied with all federal tax obligations for the 5 years before expatriation, you fail the third covered-expatriate test automatically -- and become a covered expatriate regardless of your net worth or income. Equally, simply failing to file Form 8854 at all makes you an automatic covered expatriate. There is no way to expatriate cleanly out of the exit-tax regime by ignoring the paperwork; ignoring it guarantees the worst-case classification.

This is why getting compliant BEFORE you expatriate is the central planning move. If you have unfiled returns or FBARs, the IRS Streamlined Filing Compliance Procedures (3 amended returns + 6 years of FBARs + a non-willfulness certification) are the usual route to a clean 5-year record. There is also a dedicated relief program -- Relief Procedures for Certain Former Citizens -- for non-covered individuals with relatively low net worth and modest tax who already renounced but never filed; it can wipe out the back-tax and penalties if you qualify.

Every expatriate must file Form 8854 with a final dual-status return and certify 5 years of tax compliance. Failing to file Form 8854, or failing the certification, makes you an automatic covered expatriate regardless of wealth. (IRC §6039G (information reporting on expatriation); Form 8854 (Initial and Annual Expatriation Statement); IRC §877A(g)(1)(A) (certification requirement))

What survives renunciation: the §2801 transfer tax and the $60,000 estate exemption

Some consequences of being a covered expatriate do not end on the expatriation date -- they follow you and your heirs for life. Two are decisive in the decision math:

The §2801 transfer tax. When a covered expatriate later makes a gift or leaves a bequest to a US citizen or resident, the US RECIPIENT owes a transfer tax at the highest gift/estate tax rate (currently 40%) on the value received above the annual exclusion. This is a permanent tax that reaches your American children or family every time wealth passes from you to them, for the rest of your life and at your death. It is, in effect, a toll on staying connected financially to US-person relatives.

The estate-tax cliff for US-situs assets. After renunciation you are a nonresident alien for estate-tax purposes. If you continue to hold US-situs assets (US real estate, shares of US corporations), your estate-tax exemption collapses from the citizen's $13.99 million (2025) lifetime amount to just $60,000. US-situs assets above $60,000 are exposed to US estate tax at up to 40%. Many expatriates restructure out of US-situs holdings precisely to avoid this.

Other tail effects: Social Security benefits generally continue to be payable after renunciation; foreign banks become more willing to serve you once FATCA no longer applies; PFIC rules no longer constrain your investing; and the rarely-enforced "Reed Amendment" theoretically allows barring a former citizen from re-entering the US. The renunciation itself is permanent and irrevocable, and the State Department fee is currently $2,350.

A US recipient of a gift or bequest from a covered expatriate owes the §2801 transfer tax (40%) on the value received. After renunciation, US-situs assets get only a $60,000 estate-tax exemption (vs the citizen's multi-million exemption). Renunciation is permanent. (IRC §2801 (tax on gifts and bequests from covered expatriates); IRC §2102/§2106 (nonresident-alien estate-tax exemption of $60,000); Reed Amendment (8 USC §1182(a)(10)(E)))