Covered expatriate status is a tax classification under Internal Revenue Code Section 877A that applies to certain U.S. citizens and long-term green card holders when they formally sever ties with the United States. You become one by tripping any single one of three tests: a net worth of $2 million or more, an average annual federal income tax liability above an inflation-adjusted threshold ($211,000 for 2026), or a failure to certify five years of full tax compliance on Form 8854. The label matters because it triggers a one-time mark-to-market exit tax on your worldwide assets, harsh treatment of your retirement accounts, and a 40% tax on any future gifts or bequests you make to U.S. recipients.
The Three Tests That Trigger the Status
Section 877A borrows its definition from Section 877(a)(2). Only one of the three tests has to be met.
The net worth test looks at your worldwide net worth on the date you expatriate. If it reaches $2 million, you are in. That figure counts real estate, investments, cash, business interests, and beneficial interests in trusts wherever they sit. The $2 million threshold is fixed by statute and does not adjust for inflation.
The income tax liability test looks backward at the five tax years ending before the year you expatriate. If your average annual net federal income tax over that period exceeds the inflation-adjusted amount, you are covered. For 2026 that figure is $211,000.
The tax compliance certification test is the one that catches people who are not wealthy. You must certify on Form 8854, under penalty of perjury, that you have satisfied all federal tax obligations for the five preceding tax years. That covers income tax, employment tax, gift tax, information returns, foreign bank account reports, and any outstanding liabilities, interest, or penalties. If you cannot make that certification, you are a covered expatriate automatically, regardless of your income or net worth. The IRS treats an incomplete certification the same as no certification at all, and years of missed FBARs or unfiled foreign entity information returns are enough to disqualify someone with modest finances.
Who the Rules Apply To
The exit tax is not just about giving up a passport. A lawful permanent resident who has held a green card in at least 8 of the prior 15 tax years qualifies as a “long-term resident” and faces the same analysis when the green card is surrendered or when a tax treaty treats them as a resident of another country.
The counting is unforgiving. Even a single day of green card status in a calendar year counts as a full year toward the eight-year total. Years in which you claimed treaty benefits as a resident of a foreign country do not count, but only if the treaty election was properly reported to the IRS at the time.
Green card holders who moved abroad years ago and stopped thinking about U.S. taxes are the group most often surprised. If the card was never formally abandoned, those years continue to accumulate, and Section 877A can apply the moment the IRS treats residency as terminated.
The Narrow Exceptions
Two exceptions can spare a person from covered expatriate status even if the financial numbers are met. Both are narrow, and neither excuses you from the compliance certification.
The first applies to people born as citizens of both the United States and another country. To qualify, you must still be a citizen and tax resident of that other country at the time you expatriate, and you must not have been a U.S. resident for more than 10 of the 15 tax years ending with the year of expatriation.
The second applies to expatriation before age 18½, provided you were a U.S. resident for no more than 10 tax years before the departure date. In practice, this reaches children born abroad to U.S. parents who spent limited time in the country and renounce early.
Either exception removes the net worth and income tests, but the compliance certification still has to be made. Miss that, and you are covered anyway.
The Mark-to-Market Exit Tax
The centerpiece of Section 877A is a deemed sale. On the day before you expatriate, you are treated as having sold every asset you own worldwide at fair market value. The gain on that hypothetical sale is taxable income for that year, even though nothing was actually sold and no cash changed hands.
An inflation-adjusted exclusion softens the blow. For 2026, the first $910,000 of net gain across all your assets is excluded. Gain above that is taxed at the ordinary income or capital gains rates that would apply to each asset if it had really been sold.
Three categories of property are pulled out of the mark-to-market pool and handled separately: deferred compensation items, specified tax-deferred accounts, and interests in nongrantor trusts. Everything else goes through the deemed sale, including brokerage accounts, real estate, private business interests, art, and cryptocurrency.
Retirement Accounts and Deferred Compensation
Retirement assets are usually where covered expatriate status hurts the most, because their normal tax-deferred treatment disappears on the day before you leave.
IRAs and Other Tax-Deferred Accounts
If you are a covered expatriate, you are treated as receiving a full distribution of the entire balance of every IRA (traditional or Roth), 529 plan, Coverdell education savings account, health savings account, and Archer MSA on the day before you expatriate. The whole balance is included in that year’s income. The one relief is that no early distribution penalty applies, even if you are under 59½.
401(k) Plans, Pensions, and Other Deferred Compensation
Deferred compensation items like 401(k) plans, defined-benefit pensions, and deferred bonuses split into two tracks.
If the payor is a U.S. entity and you irrevocably waive any treaty-based reduction of withholding, the arrangement counts as “eligible” deferred compensation. The plan stays intact, but every future taxable payment is subject to 30% withholding at the source. You receive the remaining 70% and settle any additional tax through your own filings.
If those conditions are not met, the arrangement is “ineligible,” and the present value of your accrued benefit is treated as distributed on the day before expatriation. The full present value hits your taxable income immediately. Again, no early distribution penalty applies to this deemed distribution.
Trust Interests
Trust planning is common among people considering expatriation, and Section 877A reaches into both grantor and nongrantor trusts.
For a nongrantor trust, distributions to a covered expatriate beneficiary carry a 30% withholding requirement on the taxable portion, meaning the amount that would have been includible in your income if you were still a U.S. citizen or resident. If the distributed property has appreciated beyond the trust’s basis, the trust itself recognizes gain as though it sold the property to you at fair market value. You are automatically treated as having waived any treaty-based reduction of withholding on these distributions.
For a grantor trust, portions of the trust that you are treated as owning under the grantor trust rules are pulled into the mark-to-market deemed sale on the day before expatriation, exactly as if you held the assets directly.
The 40% Tax on Future Gifts and Bequests
Covered expatriate status does not end when you leave. Section 2801 imposes a separate tax on U.S. citizens, residents, and domestic trusts that receive gifts or bequests from a covered expatriate. The rate is 40%, and it is paid by the recipient, not by you.
An annual exclusion applies. For 2026, the first $19,000 in covered gifts and bequests received from a covered expatriate in a calendar year is exempt. Amounts above that are taxed at the full 40%, reduced by any foreign gift or estate tax the covered expatriate already paid on the same transfer.
Recipients report the transfer on Form 708 and pay the tax. The form is due by the 15th day of the 18th month after the close of the calendar year in which the gift or bequest was received. No filing is required if total covered gifts and bequests for the year stay at or below the exclusion. The burden of determining whether the transferor is a covered expatriate falls on the recipient, which creates real practical difficulties for family members who may not have visibility into your tax history.
There is no statute of limitations on the status. Every gift or bequest you make to a U.S. person during your lifetime, and on your death, will trigger a Section 2801 analysis.
Form 8854 and Deferring the Tax
Everyone who renounces citizenship or terminates long-term residency has to file Form 8854, whether or not they turn out to be a covered expatriate. The form is both the expatriation statement and the vehicle for the compliance certification.
Preparing it means assembling a fair-market-value inventory of all worldwide assets and liabilities as of the day before you expatriate, along with cost basis documentation for every asset. The initial form attaches to your income tax return (Form 1040, 1040-SR, or 1040-NR) for the year that includes your expatriation date, and a separate original goes to the IRS processing center in Austin, Texas.
The penalty for failing to file Form 8854, or filing it with incomplete or incorrect information, is $10,000 per year. Reasonable cause may excuse the penalty; willful neglect will not.
If you cannot or do not want to pay the exit tax immediately, you can elect to defer it on a property-by-property basis until the asset is actually sold. The election is irrevocable and applies only to assets you specifically list. Deferral has three costs: you must post adequate security (typically a bond meeting Section 6325 requirements or a letter of credit acceptable to the IRS), interest accrues on the deferred tax from the original due date, and you must irrevocably waive any treaty rights that would otherwise block the IRS from assessing or collecting the tax. You also have to keep filing Form 8854 every year until the deferred tax and interest are fully paid.
Public Listing and Permanence
Under Section 6039G, the IRS publishes the names of everyone who renounces citizenship or ends long-term residency in the Federal Register on a quarterly basis. The list does not separate covered from non-covered expatriates. The publication is permanent and publicly searchable.
There is no mechanism to cure covered expatriate status after the fact. If the label attaches when you leave, it attaches for good, and the Section 2801 consequences follow you and your U.S. beneficiaries indefinitely. Getting the tests, the certification, and the Form 8854 filing right at the time of departure is the only real protection.