Covered Expatriate Tax Liability Tests and Exit Tax

If you renounce U.S. citizenship or give up long-term permanent residency, the covered expatriate exit tax applies when you fail any one of three IRS tests: an average annual federal income tax above $211,000 for 2026, a net worth of $2 million or more, or an inability to certify five years of full tax compliance. Trip any single test and the IRS treats your worldwide assets as sold the day before you expatriate, taxing the deemed gain above a $910,000 exclusion at capital gains rates.

The Three Tests That Make You a Covered Expatriate

The rules sit in Section 877A of the Internal Revenue Code, which pulls its benchmarks from Section 877(a)(2). The tests operate independently. Failing one is enough.

The net worth test looks at your total worldwide net worth on the date of expatriation. If it reaches $2 million, you meet the test. Real estate, retirement accounts, brokerage holdings, business interests, personal property, and assets held abroad all count. Liabilities reduce the figure. Most people with a diversified portfolio and a paid-off home cross this line sooner than they expect.

The average annual tax liability test measures your average net federal income tax after credits for the five tax years ending before your expatriation date. For 2026 expatriations, the inflation-adjusted threshold is $211,000.¹ One unusually high-income year within the window can pull the average above the line even if the other four years were modest.

The tax compliance certification test requires you to certify under penalty of perjury that you met every federal tax obligation for the five years before expatriation.² That covers income tax returns, foreign bank account reports, and information returns for foreign trusts or corporations. Miss one filing and you become a covered expatriate automatically, whatever your income or net worth. A single overlooked form from three years back can pull in the full exit tax on someone otherwise nowhere near the financial thresholds.

Narrow Exceptions for Dual Citizens From Birth and Minors

Two exceptions can spare you from covered status even if you meet the net worth or income test. Both still require the five-year compliance certification, so neither is a full escape.

The first covers people who were dual citizens at birth. You must have been born a U.S. citizen and a citizen of another country at the same time, still hold that other citizenship, be taxed as a resident there, and have spent no more than ten of the last fifteen tax years as a U.S. resident.³ Someone born dual U.S.-Canadian who lived and paid taxes mainly in Canada would likely qualify. Someone born dual who built a career in the United States generally would not.

The second covers minors who relinquish citizenship before turning 18½, provided they have not been U.S. residents for more than ten years before the relinquishment date.³

How the Mark-to-Market Exit Tax Works

Once you’re a covered expatriate, the IRS treats nearly all your worldwide property as sold at fair market value on the day before your expatriation date. Nothing actually changes hands. But the gain between your basis and that fair market value becomes taxable as if you had sold.

For 2026, the first $910,000 of the deemed gain is excluded.¹ Gain above that exclusion is taxed at capital gains rates, which reach 23.8% once the net investment income tax is added. Real estate, private business interests, and other hard-to-value assets typically need professional appraisals, because the IRS can challenge valuations that look artificially low.

Basis is generally what you originally paid. If you owned the asset before you became a U.S. resident, your basis is its fair market value on the date you entered the U.S. tax system.

Three categories sit outside the mark-to-market calculation: deferred compensation items, specified tax-deferred accounts, and interests in nongrantor trusts.⁴ They aren’t exempt; they follow separate rules.

Retirement Accounts and Deferred Compensation

Specified tax-deferred accounts get the simplest and often harshest treatment. Traditional IRAs, 529 plans, Coverdell accounts, health savings accounts, and Archer MSAs are all treated as fully distributed the day before expatriation. The entire balance is taxed as ordinary income for that year, though no early distribution penalty applies.⁴ A large traditional IRA can generate a six-figure tax bill at the top ordinary rates.

Deferred compensation items such as pensions, stock options, and foreign retirement plans split into two paths. If the payor is a U.S. person, or a foreign payor that elects U.S. treatment, the item is “eligible” deferred compensation. The payor withholds 30% from each future payment. You must notify the payor of your covered expatriate status and irrevocably waive any treaty right to reduced withholding.⁴

Anything that fails those conditions is “ineligible” deferred compensation. The present value of the entire accrued benefit is deemed distributed the day before expatriation and taxed immediately.

Deferring Payment of the Exit Tax

You don’t have to pay the mark-to-market tax all at once. You can elect to defer payment on an asset-by-asset basis, but the IRS attaches real conditions.

To defer, you must sign a formal tax deferral agreement and provide adequate security. That means a bond meeting the requirements of Section 6325 or another form the IRS approves, such as a letter of credit.⁵ You must appoint a U.S.-based limited agent to receive IRS communications about the agreement, and you must irrevocably waive any treaty right that would block the IRS from assessing or collecting the deferred amount. Interest runs on the unpaid balance, and the full deferred tax comes due when you dispose of the underlying asset.

The 40% Tax on U.S. Recipients of Your Later Gifts and Bequests

The exit tax is not the only price of covered status. Section 2801 imposes a separate transfer tax on any U.S. person who later receives a gift or inheritance from a covered expatriate. The recipient pays it, not you.

The rate equals the top federal estate tax rate of 40%.⁶ It applies to covered gifts and bequests received in a calendar year that exceed the annual gift tax exclusion, which is $19,000 for 2026.⁷ Any foreign gift or estate tax paid on the same transfer reduces the Section 2801 tax dollar for dollar.⁸ When a covered gift or bequest goes to a domestic trust, the trust itself owes the tax. The IRS published final regulations in January 2025 with the operational details.⁹

For anyone planning to leave assets to U.S. children or a surviving spouse, this stacks a 40% recipient tax on top of the exit tax already paid.

Filing Form 8854 in the Year You Expatriate

Form 8854, the Initial and Annual Expatriation Statement, is the central document. Completing it takes a full inventory of your financial life.

You’ll report the fair market value and adjusted basis of every worldwide asset and liability as of your expatriation date.¹⁰ You’ll calculate the five-year average of your net federal income tax, identify every deferred compensation arrangement and nongrantor trust interest, and pin down the exact date of the expatriating act, such as when your Certificate of Loss of Nationality was issued. Five years of federal tax returns should be on hand to support the compliance certification.

The year of expatriation is usually a dual-status year: U.S. person for part of it, nonresident for the rest. If you’re a nonresident on December 31, you file Form 1040-NR marked “Dual-Status Return” at the top, with a Form 1040 attached as a “Dual-Status Statement” showing income from the resident portion. Dual-status filers cannot take the standard deduction, cannot use head-of-household rates, and generally cannot file jointly unless the spouse is a U.S. citizen or resident and both elect joint treatment.¹¹

Your initial Form 8854 attaches to this return and is due when the return is due. A duplicate marked “Copy” goes to the IRS processing facility in Austin, Texas.⁵ Exit tax owed can be paid through the Electronic Federal Tax Payment System.¹²

Annual Filings After You Leave

Expatriation doesn’t close your IRS file if you deferred any exit tax, hold eligible deferred compensation, or hold an interest in a nongrantor trust. In any of those situations, Form 8854 becomes an annual filing.⁵

Deferred tax comes due, with interest, when you dispose of the asset. Annual filings continue until the deferred balance is paid. For eligible deferred compensation and nongrantor trust interests, each annual filing certifies whether distributions occurred and reports the amounts.

Section 6039G separately requires former citizens and long-term residents to file an annual information statement covering foreign residence, citizenship, income, assets, liabilities, and days spent in the United States during the year.¹³

Penalties for Getting It Wrong

The IRS charges a flat $10,000 penalty for each year Form 8854 is not filed, or is filed with incomplete or incorrect information. The same $10,000 penalty applies to failures under Section 6039G annual reporting.¹³ Both can be waived for reasonable cause without willful neglect, but the IRS reads that standard narrowly.

If exit tax goes unpaid, the ordinary failure-to-pay penalty of 0.5% per month applies, capped at 25%. Failing to file the underlying return runs 5% per month, also capped at 25%, with a minimum penalty when the return is more than 60 days late.¹⁴ Interest runs on top of the penalties. With large deemed gains in play, a few months of delay can add tens of thousands of dollars to the bill.

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Office of the Law Revision Counsel. 26 U.S. Code 877 – Expatriation to Avoid Tax
3
U.S. Embassy & Consulates. U.S. Tax Consequences of Expatriation
4
Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation
5
Internal Revenue Service. Instructions for Form 8854
6
Office of the Law Revision Counsel. 26 U.S. Code 2001 – Imposition and Rate of Tax
7
Internal Revenue Service. What’s New – Estate and Gift Tax
8
Office of the Law Revision Counsel. 26 U.S. Code 2801 – Imposition of Tax
9
Internal Revenue Service. Gifts From Foreign Person
10
Internal Revenue Service. Form 8854 – Initial and Annual Expatriation Statement
11
Internal Revenue Service. Taxation of Dual-Status Individuals
12
Internal Revenue Service. EFTPS: The Electronic Federal Tax Payment System
13
Office of the Law Revision Counsel. 26 U.S. Code 6039G – Information on Individuals Losing United States Citizenship
14
Office of the Law Revision Counsel. 26 U.S. Code 6651 – Failure to File Tax Return or to Pay Tax