Departure Tax: Covered Expatriates, Form 8854, and Deferral

The US departure tax, formally the expatriation tax under 26 U.S.C. § 877A, is a one-time levy on the built-in gain in your worldwide assets when you give up U.S. citizenship or long-term resident status. It only hits people classified as “covered expatriates,” and even then the first $910,000 of net gain is excluded in 2026.¹ The idea is to tax appreciation that accrued while you lived in the United States before you move beyond the IRS’s reach.

Who Owes the Tax

Renouncing citizenship or handing back a green card does not automatically create an exit tax bill. You have to be a “covered expatriate,” which means tripping any one of three independent triggers:²

Your worldwide net worth is $2 million or more on the date you expatriate.
Your average annual net income tax liability for the five years before expatriation exceeds an inflation-adjusted figure, which is $211,000 for 2026.¹
You fail to certify on Form 8854 that you met all federal tax obligations for the five years before your expatriation date.

The third trigger is the one that surprises people. Someone comfortably under the wealth and income thresholds still becomes a covered expatriate if they skip the certification or have an unfiled return in those five years. That single paperwork failure can pull an otherwise ordinary filer into the full regime.

Long-term green card holders are treated the same as citizens for these purposes. If you held a green card during at least eight of the fifteen tax years ending with the year you leave, the same rules apply to you.²

How the Tax Is Calculated

Once you are a covered expatriate, the IRS treats every piece of property you own around the world as if you sold it the day before your expatriation date at fair market value. No actual sale happens, but the resulting gain or loss is computed as though one did.³ Stocks, bonds, mutual funds, real estate here and abroad, partnership interests, accrued dividends and interest, notes, and cash-value instruments are all in.

The 2026 exclusion of $910,000 applies to total net gain across all your assets, not asset by asset. So a covered expatriate whose worldwide holdings have appreciated by $1.5 million would owe tax on $590,000, at the rates that apply to each type of gain: ordinary income rates for short-term, capital gains rates for long-term.¹

Three categories of property sit outside the deemed sale and follow their own rules: deferred compensation, specified tax-deferred accounts, and interests in nongrantor trusts.⁴

Retirement Accounts

IRAs, 529 plans, Coverdell education savings accounts, health savings accounts, and Archer MSAs are “specified tax-deferred accounts” under § 877A(e). Your entire balance in each is treated as distributed to you the day before expatriation and included in your gross income for that year. The early-distribution penalty does not apply to the deemed distribution, even if you are under 59½.⁴

Deferred Compensation

Deferred compensation splits into two categories. Eligible items, such as payments from a qualified employer plan, are not taxed up front. Instead, the payor withholds 30 percent of each taxable payment when it is eventually made. Ineligible items, such as nonqualified plans and stock options subject to vesting, are treated as distributed at present value the day before expatriation and taxed in full that year.⁴

Form 8854 and When Payment Is Due

Form 8854 is the central document. It is both the compliance certification and the place where you report the deemed sale, list your worldwide assets, and calculate the tax.⁵ The form has a balance sheet requiring fair market value and adjusted basis for each asset and liability on your expatriation date, plus the present value of any pension or deferred compensation interest.⁶

You file Form 8854 with your income tax return for the year that includes the day before your expatriation date, by the normal filing deadline including extensions. Any tax owed on the deemed sale is due when you file. Getting valuations right matters, especially for private business interests, foreign real estate, and other illiquid holdings that require supportable appraisals.

Electing to Defer Payment

If the bill is large and you would rather not liquidate assets to pay it, § 877A(b) lets you make an irrevocable election to defer payment on a property-by-property basis. The deferred tax on any asset comes due when you actually dispose of it, or on another date the IRS prescribes if the disposal is a nonrecognition transaction.⁴

Two conditions come with the deferral. You must post adequate security, such as a bond meeting § 6325 requirements or a letter of credit, and interest accrues on the deferred amount at the § 6601 underpayment rate for the entire period. The extension ends no later than the due date for the return covering the year you die, and if your security lapses and you do not fix it within the time the IRS specifies, the whole deferred balance accelerates.

What Your U.S. Heirs and Giftees Will Owe

The exit tax is not the only cost of becoming a covered expatriate. Under § 2801, a U.S. citizen or resident who later receives a gift or inheritance from you owes a separate tax equal to the highest federal estate tax rate, currently 40 percent, on the value received.⁷ Normal gift and estate taxation puts the burden on the giver; this rule flips it onto the American recipient.

Transfers up to the annual gift tax exclusion are exempt, which is $19,000 per recipient in 2026. Recipients report and pay on Form 708 by June 15 of the year after they receive the transfer. A six-month filing extension is available, but it does not extend the payment deadline.⁸ U.S. family members and beneficiaries need to know about your covered expatriate status, or they can be caught off guard by a 40 percent bill on what they thought was a straightforward inheritance.

Two Exceptions to Covered Expatriate Status

Two narrow exceptions exist for people who technically meet the thresholds but have limited real ties to the United States.²

Dual citizens at birth who are still citizens and tax residents of the other country at expatriation.
People who expatriate before turning 18½ and were U.S. residents for fewer than ten tax years.

Both exceptions still require filing Form 8854 and certifying compliance. They remove you from the mark-to-market regime and the other covered-expatriate consequences, not from the paperwork.

If You Are Turning In a Green Card

Long-term residents face an extra procedural step citizens do not. Before physically leaving, most departing aliens must obtain a Certificate of Compliance, commonly called a sailing permit, by filing Form 1040-C or Form 2063 at a local IRS office and paying any taxes shown as due, including amounts owed for prior years.⁹ The application window is two to four weeks before departure, and no earlier than 30 days out. Some visa categories, including certain F-1 and J-1 students and short-stay B-1/B-2 visitors, are exempt. The sailing permit is separate from Form 8854 and the exit tax itself, but skipping it can create enforcement problems at departure.

The Cost of Skipping the Paperwork

Failing to file Form 8854, or filing with missing or incorrect information, triggers a $10,000 penalty under § 6039G. The only defense is showing reasonable cause rather than willful neglect.¹⁰

The penalty is the smaller problem. Skipping the compliance certification automatically makes you a covered expatriate, no matter your net worth or income, and drops you into the full mark-to-market regime. People who would have owed nothing on the merits end up owing the exit tax purely because a return was missed or the certification was left blank.

1
Internal Revenue Service. Rev. Proc. 2025-32
2
Internal Revenue Service. Expatriation Tax
3
Internal Revenue Service. Expatriation On or After June 17, 2008 – Mark-to-Market Tax Regime
4
Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation
5
Internal Revenue Service. Instructions for Form 8854 (2025)
6
Internal Revenue Service. Form 8854 – Initial and Annual Expatriation Statement
7
Office of the Law Revision Counsel. 26 USC 2801 – Imposition of Tax
8
Internal Revenue Service. What’s New — Estate and Gift Tax
9
Internal Revenue Service. Departing Alien Clearance (Sailing Permit)
10
Office of the Law Revision Counsel. 26 U.S. Code 6039G – Information on Individuals Losing United States Citizenship