The U.S. Exit Tax: Everything You Need to Know Before You Renounce

The U.S. exit tax is a federal tax imposed on covered expatriates under IRC §877A when they renounce U.S. citizenship or terminate long-term residency. It treats nearly all of a covered expatriate’s worldwide assets as sold at fair market value on the day before expatriation, then taxes the gain above an inflation-adjusted exclusion amount.

The tax reaches income you have not yet realized. These unrealized gains, which would normally be taxed only when you sell, become taxable in your final year inside the U.S. tax system. For someone holding a concentrated stock position, a closely held business, or a large retirement account, that can mean a substantial bill in a single year.

The exit tax does not apply to everyone who expatriates. It reaches only covered expatriates, a status set by three tests under §877A. This guide covers who qualifies, how the mark-to-market calculation works, how retirement accounts and deferred compensation are treated, the separate §2801 tax that can fall on U.S. heirs who receive gifts or bequests from a covered expatriate, and the planning that has to start years ahead to change the result. For a U.S. citizen or green card holder with significant assets, the exit tax is usually the largest number in the expatriation decision.

What Is the U.S. Exit Tax?

The U.S. exit tax is not a separate category of tax. It is the mark-to-market regime under IRC §877A, which applies the ordinary income and capital gains rules already in the Code to the deemed sale of a covered expatriate’s worldwide assets on the day before expatriation.

That distinction matters for planning. There is no special exit tax rate. The gain that surfaces on the deemed sale is taxed the way it would be if you had actually sold each asset: long-term capital gains tax rates on appreciated securities, ordinary rates on assets that generate ordinary income, and so on down the schedule. What §877A changes is timing. It forces recognition in your final year inside the system rather than whenever you would otherwise have chosen to sell.

Congress enacted §877A in the Heroes Earnings Assistance and Relief Tax Act of 2008, known as the HEART Act, Pub. L. 110-245. The regime applies to expatriations on or after June 17, 2008. Before that date, expatriates were taxed under the older §877 rules, which kept certain former citizens on the hook for U.S.-source income for ten years after they left. Section 877A replaced that ten-year reach with a single deemed-sale event in the year of expatriation.

The IRS has not published final regulations under §877A. Its controlling guidance remains Notice 2009-85, which sets out how the mark-to-market rules, the deferred compensation rules, and the trust rules operate in practice. Practitioners work from the statute, that notice, and the annual Form 8854 instructions.

Who Qualifies as a Covered Expatriate?

A covered expatriate is a U.S. citizen who renounces citizenship, or a long-term resident who terminates residency, and who meets any one of three tests under IRC §877A(g)(1). Meeting a single test is enough. Someone can clear the income and net worth tests comfortably and still be a covered expatriate if they cannot certify five years of tax compliance.

The three tests borrow their definitions from the older §877(a)(2), which §877A incorporates by reference. Two of them look at your finances. The third looks at your filing history

Test 1: The Average Annual Net Income Tax Test

You meet this test if your average annual net income tax liability for the five taxable years ending before the date of expatriation exceeds an inflation-adjusted threshold. For 2026, that threshold is $211,000, up from $206,000 in 2025. The figure is set annually by the IRS under Rev. Proc. 2025-32, §4.37.

Read that carefully, because it is the most misread number in the exit tax. The threshold measures tax, not income. It asks whether your average federal income tax, the actual liability on your return, exceeded $211,000 a year across the five-year window. Reaching that level of tax generally takes income in the high six figures or more, and the exact income needed depends on the mix of ordinary income and capital gains and the rates that apply to each. Many people who assume this test catches them are not close to it.

Test 2: The Net Worth Test

You meet this test if your net worth is $2 million or more on the date of expatriation. This figure comes straight from the statute and is not adjusted for inflation, so the same $2 million threshold that applied when §877A took effect in 2008 still applies today.

Net worth here means worldwide net worth, valued at fair market value. It includes real estate, business interests, retirement accounts, investment portfolios, and beneficial interests in trusts. For a high-net-worth individual, this is usually the test that applies. Most people with the assets that make expatriation a serious financial decision cross $2 million well before the other tests come into play.

Test 3: The 5-Year Tax Compliance Certification

You become a covered expatriate if you fail to certify, under penalties of perjury, that you have complied with all federal tax obligations for the five years preceding expatriation. That certification is made on Form 8854.

This test operates independently of your finances. A person of modest means who has not kept their tax filings current can be a covered expatriate on this basis alone, with a net worth well under $2 million and income tax well under the threshold. Unfiled returns, unreported foreign accounts, or an incomplete filing history in any of those five years can trigger covered status by itself. Cleaning up prior-year compliance before expatriating is often the most important step a client takes, and it is the one that needs the most lead time.

Exceptions: Dual Citizens and Young Residents

Two narrow exceptions can spare an individual from the income and net worth tests under §877A(g)(1)(B), even where the numbers would otherwise apply.

The first is for certain dual citizens from birth. It covers a person who became a U.S. citizen and a citizen of another country at birth, still holds and is taxed as a resident of that other country as of the expatriation date, and has been a U.S. resident for no more than 10 of the 15 taxable years ending with the year of expatriation.

The second is for young expatriates. It covers a person who relinquishes citizenship before reaching age 18½ and who has been a U.S. resident for no more than 10 taxable years before the date of relinquishment.

Both exceptions carry a critical limit. They excuse only the income and net worth tests. They do not excuse Test 3. An individual relying on either exception must still certify five years of full tax compliance on Form 8854. Fail that certification and covered status returns, regardless of the exception.

Not sure whether you are a covered expatriate? The answer turns on a five-year average of your net income tax, your net worth on the expatriation date, and your filing history. Our expat tax attorneys run this analysis regularly, and the earlier you know your status, the more planning options stay open.

How the U.S. Exit Tax is Calculated

The mark-to-market tax treats a covered expatriate as having sold nearly all worldwide property at fair market value on the day before the expatriation date. The resulting gain is reported on the final-year return, reduced by an exclusion amount, and taxed under the rules that would apply to each asset if it had actually been sold.

The Deemed Sale at Rule

Under IRC §877A(a), a covered expatriate is treated as selling all property at its fair market value on the day before expatriation. Nothing actually changes hands. The sale is a fiction the Code creates to pull unrealized appreciation into the tax base before you leave the system.

The rule reaches worldwide assets, not only U.S. property. Foreign real estate, shares in a foreign corporation, an interest in a foreign partnership, and a portfolio held at an overseas bank are all inside the deemed sale. A few asset types follow their own rules instead, most importantly retirement accounts, deferred compensation, and interests in nongrantor trusts, which the next section covers.

Because the deemed sale falls on the day before expatriation, its timing is fixed by the date you expatriate. That date is something planning can influence. Basis, valuations, and the expatriation date itself are the levers, and they need to be set before the year turns, not after.

The Exclusion Amount

A covered expatriate can exclude a set amount of the deemed gain from tax. For 2025, the exclusion is $890,000. The figure is adjusted annually for inflation under IRC §877A(a)(3), so the amount that applies is the one in effect for your year of expatriation. As of mid-2026, the IRS has not yet published the 2026 figure in the updated Instructions for Form 8854. Confirm the current-year number in those instructions or with your tax advisor before you calculate.

The exclusion applies to the gain from the deemed sale as a whole and is allocated across the appreciated assets on a pro rata basis, following Notice 2009-85. Consider a covered expatriate whose worldwide assets carry $3 million of net built-in gain on the day before expatriation. The first $890,000 of that gain is excluded. The remaining $2.11 million is subject to the exit tax, taxed at the rates that apply to each underlying asset.

For most high-net-worth expatriates, the exclusion covers only a fraction of the total gain. It reduces the bill; it rarely eliminates it.

Gains and Losses

Gains from the deemed sale are taxed at the rate that would apply if the asset had truly been sold. Appreciated long-term securities draw long-term capital gains tax rates. Assets that would generate ordinary income are taxed as ordinary income. The exit tax carries no flat rate of its own; it borrows the ordinary and capital gains rates already in the Code.

Losses from the deemed sale are also recognized, subject to the normal limits that would apply to a real sale under IRC §877A(a)(2). One familiar limit does not apply here. The wash sale rule under IRC §1091, which normally disallows a loss when you buy back a substantially identical security within 30 days, does not apply to the deemed sale. Section 877A(a)(2)(B) turns it off. That difference can matter when a portfolio holds both gains and losses at expatriation.

Special Rules for Retirement Accounts, Deferred Compensation, and Trusts

Not every asset runs through the deemed sale. Retirement accounts, employer deferred compensation, and interests in nongrantor trusts each follow their own exit tax rules under §877A rules, and the differences change both the timing and the size of the tax. To put any of these rules in motion, a covered expatriate generally files Form W-8CE with the payor within 30 days of the expatriation date.

IRAs and Specified Tax-Deferred Accounts

A specified tax-deferred account is treated as fully distributed on the day before expatriation. Under IRC §877A(e), the covered expatriate is deemed to receive the entire account balance that day, and the full amount is taxed as ordinary income on the final-year return. The category covers traditional and Roth IRAs, health savings accounts, Archer MSAs, 529 plans, ABLE accounts, and Coverdell education savings accounts.

The one break here is the early-distribution penalty. The 10% additional tax under §72(t) does not apply to the deemed distribution, even for an account holder under 59½. Roth accounts follow their own qualified-distribution analysis, which turns on age and how long the account has been open.

Because the account is treated as distributed in full, a large traditional IRA can generate one of the biggest single line items in an exit tax calculation. A $2 million pre-tax IRA is $2 million of ordinary income in the year of expatriation, taxed at rates up to 37%, with no exclusion amount to soften it. The exclusion applies to mark-to-market gain, not to deemed retirement distributions.

Eligible Deferred Compensation

Employer deferred compensation is not accelerated the way an IRA is. Instead, IRC §877A(d)(1) applies a flat 30% withholding to each taxable payment when it is actually paid after expatriation. A 401(k), a 403(b), a 457 plan, and an employer pension generally fall here.

Two conditions make a plan eligible. The payor must be a U.S. person, or a foreign payor that elects to be treated as one, and the covered expatriate must notify the payor of covered status and irrevocably waive any treaty right to reduce the withholding. That waiver is the trade-off. The tax is deferred until payment, but the expatriate gives up the ability to claim a lower treaty rate later, and the 30% cannot be reduced.

Ineligible Deferred Compensation

Deferred compensation that does not meet the eligible conditions is taxed less favorably. Under IRC §877A(d)(2), the present value of the entire accrued benefit is treated as received on the day before expatriation and taxed as ordinary income that year, even though nothing has been paid.

This is where foreign plans land. A foreign pension, an overseas employer’s deferred bonus, and vested but unexercised stock options from a non-U.S. employer are common examples. Because the payor is foreign, the plan usually cannot meet the U.S.-payor condition, so the acceleration rule applies. A client with a substantial foreign pension can face a large, immediate tax on money they will not receive for years.

Interests in Nongrantor Trusts

Trust interests split along grantor lines. If a covered expatriate is treated as the owner of a trust, or a portion of one, under the grantor trust rules of IRC §§671 through 679 on the day before expatriation, those assets run through the mark-to-market deemed sale like any other property the expatriate owns.

A nongrantor trust interest is handled separately under IRC §877A(f). The mark-to-market rule does not apply to it. Instead, when the trust later distributes property to the covered expatriate, and the expatriate was a beneficiary on the day before expatriation, the trustee must withhold 30% of the taxable portion of the distribution. If the trust distributes appreciated property, the trust itself recognizes gain as though it had sold the property to the expatriate at fair market value. These rules apply whether the trust is domestic or foreign.

The result is a tax that can follow a covered expatriate for years. Rather than a single event at exit, a nongrantor trust interest produces a 30% withholding charge on each future distribution, and the expatriate is treated as having waived any treaty rate that might otherwise reduce it. For a client whose wealth sits largely in family trusts, this treatment often shapes the entire expatriation analysis.

Trust interests split along grantor lines. If a covered expatriate is treated as the owner of a trust, or a portion of one, under the grantor trust rules of IRC §§671 through 679 on the day before expatriation, those assets run through the mark-to-market deemed sale like any other property the expatriate owns.

A nongrantor trust interest is handled separately under IRC §877A(f). The mark-to-market rule does not apply to it. Instead, when the trust later distributes property to the covered expatriate, and the expatriate was a beneficiary on the day before expatriation, the trustee must withhold 30% of the taxable portion of the distribution. If the trust distributes appreciated property, the trust itself recognizes gain as though it had sold the property to the expatriate at fair market value. These rules apply whether the trust is domestic or foreign.

The result is a tax that can follow a covered expatriate for years. Rather than a single event at exit, a nongrantor trust interest produces a 30% withholding charge on each future distribution, and the expatriate is treated as having waived any treaty rate that might otherwise reduce it. For a client whose wealth sits largely in family trusts, this treatment often shapes the entire expatriation analysis.

PFICs

Shares in a passive foreign investment company are inside the deemed sale, and they often produce the most complicated part of the calculation. PFIC holdings interact with the separate §1291 excess-distribution regime, and the overlap between that regime and the §877A deemed sale takes careful modeling. A covered expatriate holding foreign mutual funds or other foreign pooled investment vehicles should expect the PFIC piece to require real analysis, not a quick fair-market-value subtraction.

Green Card Holders and Long-Term Residents

The exit tax is not only a citizenship issue. A green card holder can be a covered expatriate too, but only after crossing a threshold many long-term residents do not realize they have crossed.

The 8-of-15-Year Long-Term Resident Test

Only a long-term resident is exposed to the exit tax. Under IRC §877(e)(2), a long-term resident is a lawful permanent resident who held the green card in at least 8 of the prior 15 taxable years, counting back from the year residency ends.

The count is strict in one respect and forgiving in another. Holding the card for even one day of a tax year makes that a counted year, so the eight-year mark can arrive sooner than expected. At the same time, a year in which you were treated as a resident of another country under a tax treaty, and did not waive the treaty’s benefits, does not count toward the eight. A green card holder who abandons the card before reaching eight counted years generally falls outside §877A entirely. That surrender is an immigration and residency event, not an expatriation for exit tax purposes.

The Treaty Tie-Breaker: Shield or Trigger

A tax treaty tie-breaker can work for you or against you, depending on where you are in the eight-year count.

Before you become a long-term resident, a treaty position can act as a shield. If you are treated as a tax resident of a treaty partner country, claim that position properly, and do not waive the treaty benefits, that year is excluded from the eight-year count. Used deliberately, this can stop the clock and keep you from ever becoming a long-term resident.

After you become a long-term resident, the same move becomes a trigger. Once you have eight counted years, claiming to be a resident of another country under a treaty tie-breaker is treated as an act of expatriation under IRC §7701(b)(6) and §877A. The treaty position you disclose on Form 8833 becomes the event that starts the exit tax analysis, not an escape from it. A long-term resident who files a treaty-based return position without understanding this can trigger a deemed expatriation without intending to.

Formally Ending Residency

Leaving the United States does not end your status as a lawful permanent resident. For tax purposes, LPR status continues until it is formally ended: by abandoning the green card through Form I-407, by having the status revoked, or by the treaty mechanism above. Until one of those happens, you remain a U.S. resident taxed on worldwide income, regardless of where you live.

This distinction has real consequences, and recent IRS guidance illustrates it. In Chief Counsel Advice 202501011, a green card holder left the United States, stopped filing as a resident, and later filed nonresident returns claiming treaty residence in another country. He treated that as having ended his U.S. residency. The IRS disagreed. It reasoned that the treaty mechanism for ceasing lawful permanent resident status under §7701(b)(6) is available only to a long-term resident, and because his treaty position excluded the years that would have made him a long-term resident, that mechanism never applied to him. He remained a U.S. person for income tax purposes until his green card was formally abandoned or revoked. Chief Counsel Advice cannot be cited as precedent, but the reasoning shows how the IRS reads the statute.

For a long-term resident who is a covered expatriate, ending residency does not erase the exit tax. It sets the expatriation date on which the mark-to-market calculation runs. Form 8854 and a final return are still required.

The §2801 Tax: Exit Tax on Gifts and Bequests from Covered Expatriates

The exit tax has a second half that most people never see coming. Under IRC §2801, a U.S. citizen or resident who receives a gift or bequest from a covered expatriate can owe a 40% tax on what they receive. The tax falls on the recipient, not on the expatriate.

This reverses the usual rule. Ordinary U.S. gift and estate tax is paid by the person giving or the estate transferring. Section 2801 shifts the burden to the U.S. person on the receiving end. A covered expatriate can move abroad, and years or even decades later, a gift to a U.S. child or a bequest to a U.S. relative can land a 40% transfer tax on that recipient.

How the §2801 Tax Works

The tax applies to covered gifts and covered bequests, meaning property a U.S. person receives, directly or indirectly, from a covered expatriate. It reaches assets anywhere in the world, and it does not matter whether the expatriate acquired the property before or after leaving the United States.

The rate is the highest federal estate tax rate in effect, currently 40%. It applies to the total covered gifts and bequests received during the year, reduced by the annual gift tax exclusion, which is $19,000 for 2025 and 2026 and adjusts for inflation. Unlike ordinary gift and estate tax, no lifetime exemption shelters the transfer. The multimillion-dollar exemption that protects normal transfers does not exist here. A credit is available for any foreign gift or estate tax paid on the same transfer.

Certain transfers are excluded. Gifts to a U.S. citizen spouse and gifts to charity fall outside the tax, mirroring the marital and charitable deductions in the ordinary transfer tax rules. So does any transfer the covered expatriate reported on a timely U.S. gift or estate tax return.

Form 708 and the New Filing Regime

Section 2801 sat on the books without a way to report it from 2008 until recently. The IRS issued final regulations in January 2025 and released Form 708, the return recipients use to report and pay the tax, in January 2026. The regulations apply to covered gifts and bequests received on or after January 1, 2025.

Form 708 is filed by the U.S. recipient, not the expatriate. It is due by the 15th day of the 18th month following the close of the calendar year in which the gift or bequest was received, so the first returns, covering 2025 transfers, come due in 2027. The recipient carries the reporting burden, which means a U.S. beneficiary first has to know that a gift or inheritance came from a covered expatriate at all.

This is where expatriation planning and estate planning meet. A covered expatriate with U.S. citizen children or grandchildren has, in effect, attached a 40% tax to whatever they later give or leave those heirs. Planning before expatriation can change that result, whether through the spousal and charitable exclusions, lifetime gifts structured around the annual exclusion, or trusts built with §2801 in mind. Because the tax lands on the next generation rather than on the expatriate, these decisions are best made with tax and estate planning counsel working together. At Evolution Tax & Legal, our work in estate planning for high-net-worth families is often part of the same conversation as an expatriation analysis.

How Tax Treaties Interact with the U.S. Exit Tax

A U.S. income tax treaty rarely overrides the exit tax. Most treaties do not address expatriation at all, and the saving clause common to U.S. treaties preserves the government’s right to tax its citizens and, for a period after they leave, its former citizens and long-term residents.

Treaties do matter at the edges. As covered above, a treaty tie-breaker can determine whether a green card holder ever becomes a long-term resident, and it can set the expatriation date. For eligible deferred compensation, the treaty cuts the other way. To obtain the deferred 30% withholding treatment, a covered expatriate must waive any treaty right to a reduced rate, giving up the treaty benefit as a condition of the favorable timing.

The larger treaty problem is usually coordination with the destination country. The United States treats a covered expatriate’s assets as sold at their market value on the day before expatriation, which resets the U.S. view of gain. The new country of residence often does not recognize that deemed sale. It keeps the original cost basis, so when the asset is actually sold later, the foreign country taxes the same appreciation the United States already taxed at exit.

Consider a covered expatriate who moves to a country that retains original cost basis. She pays U.S. exit tax on the built-in gain in her portfolio at departure. Years later she sells, and her new country taxes the full gain measured from her original purchase price, with no credit for the U.S. tax already paid. The same appreciation is taxed twice. Few treaties provide a mechanism to relieve that mismatch.

This is one of the most fact-specific parts of any expatriation analysis. The answer depends on the particular treaty, the destination country’s domestic law, and the mix of assets involved. It is worked out case by case, not from a general rule.

Planning to Minimize Your U.S. Exit Tax Exposure

Planning for the exit tax works only with lead time. The covered expatriate tests look back five years, and the compliance certification covers five years, so decisions made in the final months before expatriation rarely change the outcome. The clients who reduce their exposure are the ones who start the analysis years ahead.

The limits are worth naming too. For a genuinely high-net-worth individual, the mark-to-market tax is usually a cost to manage rather than one to escape. The value of planning lies in timing the event, keeping compliance clean, structuring specific assets correctly, and protecting the next generation from the §2801 tax. Anyone promising a way to simply escape the tax on a large, appreciated balance sheet is not describing a strategy that survives contact with the statute. This is legitimate planning, not tax avoidance.

Compliance Comes First

The five-year certification is the foundation. A person who cannot certify full federal tax compliance for the five years before expatriation is a covered expatriate regardless of net worth or income. Unfiled returns, unreported foreign accounts, or missing information returns in that window can create covered status on their own.

For clients with international exposure, this often means resolving prior-year gaps before expatriation. Depending on the facts, that can run through the IRS streamlined filing compliance procedures or a voluntary disclosure. Cleaning up compliance takes the most lead time of anything in the process, which is why it comes first.

Timing and the Assets That Drive the Tax

Once compliance is in order, the planning turns to the mark-to-market base. The deemed sale falls on the day before the expatriation date, so the choice of when to expatriate can matter, particularly around a liquidity event, a low-income year, or the sale of a business.

Which assets carry the most built-in gain also drives the number. A concentrated low-basis stock position, a closely held business, or a large traditional IRA can each dominate the calculation, and each is handled differently under the rules covered above. Understanding the composition of the balance sheet, not just its size, is where the real analysis happens.

For someone near the $2 million net worth threshold rather than far above it, lifetime gifting as part of a broader estate plan can affect covered status. For a client well above the threshold, gifting will not change covered status, but it can still reduce the base subject to the deemed sale and address §2801 and broader U.S. estate tax exposure for U.S. heirs at the same time.

The Deferral Election for Illiquid Assets

The exit tax is generally due with the final-year return, which is a problem when the gain is locked in an asset that has not been sold. Section 877A(b) lets a covered expatriate make an irrevocable election to defer payment of the mark-to-market tax, asset by asset, until the asset is actually sold.

The election is not free. It requires adequate security, typically a bond or letter of credit, along with a waiver of treaty benefits, and interest accrues on the deferred amount. For an illiquid asset such as an interest in a private business, deferral can still be worthwhile, because it avoids paying tax in cash on a gain the expatriate has not yet received. Whether it makes sense depends on the cost of the security weighed against the benefit of waiting.

Form 8854: The Expatriation Filing Requirement

Form 8854 is the document that makes an expatriation official for tax purposes. Titled the Initial and Annual Expatriation Statement, it does three things: it notifies the IRS that you have expatriated, it reports the information the government needs to determine covered expatriate status, and it carries the five-year compliance certification that decides Test 3.

Until Form 8854 is filed, the IRS continues to treat you as a U.S. person subject to tax on worldwide income. Renouncing citizenship at a consulate or abandoning a green card does not, by itself, close out your tax status. The form is what connects the immigration act to the tax result.

Who Files and When

Every expatriate files Form 8854, not only covered expatriates. A non-covered expatriate files it to report that status and to make the compliance certification. Even someone who qualifies for the dual-citizen or young-resident exception must still file and certify, because the failure to certify is itself what creates covered status.

The initial Form 8854 is filed with your income tax return for the year that includes the expatriation date, by the due date of that return including extensions. Because the year of expatriation is usually a dual-status year, that return often pairs a Form 1040 for the resident portion with a Form 1040-NR for the nonresident portion. A signed copy of Form 8854 also goes to the IRS separately.

Form 8854 can also be an annual obligation. A covered expatriate who deferred the mark-to-market tax, reported an eligible deferred compensation item, or holds an interest in a nongrantor trust files Form 8854 each year until those items are resolved.

The $10,000 Penalty

Form 8854 is an information return under IRC §6039G, and the penalty for getting it wrong is real. Failing to file, filing late, or omitting required information carries a $10,000 penalty for the year, unless the failure was due to reasonable cause and not willful neglect. The IRS has imposed these penalties and sends notices to expatriates who did not file.

For a covered expatriate, an incomplete Form 8854 also puts the compliance certification at risk, which can turn a filing error into covered status. The form deserves the same care as the return it accompanies.

If You Are Already Behind

For former citizens who never filed and now want to come into compliance, the IRS offers the Relief Procedures for Certain Former Citizens, announced in 2019. The relief is narrow. It is limited to individuals with non-willful conduct, no prior filing history, net worth under $2 million, and no more than $25,000 of aggregate U.S. tax across the six relevant years. Those limits put it out of reach for most high-net-worth individuals, who instead resolve prior-year gaps through the streamlined procedures or a voluntary disclosure before expatriating.

Before You Expatriate

The exit tax rewards early, coordinated planning. The covered expatriate tests reach back five years, the mark-to-market calculation turns on the composition of your entire balance sheet, and the §2801 tax can follow a gift or bequest to your U.S. heirs long afterward. These pieces interact, and they raise tax, estate, and cross-border questions at the same time.

That combination is what Evolution Tax & Legal handles. If you are a U.S. citizen or long-term green card holder weighing expatriation, a consultation is the right first step, ideally well before you set an expatriation date. We can model your exposure, confirm whether you would be a covered expatriate, and build a plan that accounts for the tax itself, your estate, and the people who would receive what you leave behind.

Frequently Asked Questions 

Does the U.S. have an exit tax?

Yes. Under IRC §877A, the United States imposes a mark-to-market exit tax on covered expatriates who renounce citizenship or end long-term residency. It does not apply to everyone who leaves, only to those who meet the covered expatriate tests.

How much is the U.S. exit tax?

There is no single rate. The exit tax applies the ordinary income and capital gains rates already in the Code to the gain on a deemed sale of your worldwide assets, after an exclusion amount ($890,000 for 2025, adjusted annually for inflation). The size of the bill depends on your assets and their built-in gain.

Who has to pay the U.S. exit tax?

Only covered expatriates. You are a covered expatriate if you meet any one of three tests: an average annual net income tax above the inflation-adjusted threshold ($211,000 for 2026), a net worth of $2 million or more, or a failure to certify five years of federal tax compliance on Form 8854.

Do green card holders pay the exit tax?

They can, but only long-term residents are exposed. A green card holder becomes a long-term resident after holding the card in at least 8 of the last 15 tax years. Someone who gives up the card before reaching that mark generally avoids the exit tax.

How can I reduce my U.S. exit tax exposure?

Planning has to begin years ahead, because the covered expatriate tests look back five years. The main steps are keeping five years of clean compliance, timing the expatriation date, structuring deferred and illiquid assets, and using the §877A(b) deferral election where it helps. For a large, appreciated balance sheet, the tax is usually managed rather than eliminated.

How much does it cost to renounce U.S. citizenship?

The State Department charges a $450 fee to process a renunciation and issue a Certificate of Loss of Nationality, reduced from $2,350 effective April 13, 2026. That administrative fee is separate from the exit tax, which is a function of your assets and applies only to covered expatriates.

Is the U.S. exit tax the same as the §2801 tax?

No. The exit tax falls on the covered expatriate at departure. The §2801 tax falls on the U.S. citizen or resident who later receives a gift or bequest from a covered expatriate, at a 40% rate, and it can apply years after the expatriation.

What happens if I do not file Form 8854?

Until you file, the IRS continues to treat you as a U.S. person taxed on worldwide income, and a failure to file carries a $10,000 penalty under §6039G. For someone who would otherwise not be covered, failing to certify compliance on the form can itself create covered expatriate status.

This article is for informational purposes only and does not constitute legal or tax advice. Tax laws and regulations change frequently and may affect the accuracy of this information. Consult a qualified tax attorney or CPA before making any decisions based on the content of this article.