Expatriation Net Worth Test: Are You a Covered Expatriate?

If your worldwide net worth reaches $2 million on the day before you give up U.S. citizenship or long-term permanent residency, the expatriation net worth test makes you a “covered expatriate” under 26 U.S.C. § 877A. That single threshold triggers a mark-to-market tax on nearly everything you own, plus a lasting 40% tax on future gifts and bequests you make to anyone still in the U.S. tax system. The $2 million figure is fixed by statute and does not adjust for inflation, so the calculation deserves attention well before you sit down at a consulate.¹

How the $2 Million Figure Is Calculated

The IRS measures your net worth as of the day before your expatriation date. The math is simple in structure: add up the fair market value of everything you own worldwide, then subtract your total liabilities. What comes out the other side is the number that gets compared to $2 million.²

Fair market value is the price a willing buyer would pay a willing seller when neither side is under pressure and both understand the relevant facts. Publicly traded stocks and bonds use the market price. Real estate, private business stakes, and collectibles need appraisals. Beneficial interests in trusts, other than nongrantor trusts, are valued using the gift tax valuation principles of IRC § 2512.³

Liabilities count. A home appraised at $2.4 million with a $700,000 mortgage contributes $1.7 million to your net worth, not $2.4 million. Form 8854’s balance sheet asks you to list every liability alongside your assets and subtracts the total to produce your final net worth figure.²

Assets held jointly with a spouse are split. In a community property state, each spouse owns half of community assets, so you list 50% of the value and 50% of the associated debt. The test applies individually, not to a couple’s combined balance sheet.

What Goes on the Balance Sheet

The Form 8854 balance sheet is broad. You will need documentation and valuations across every category you touch:

Cash and bank accounts everywhere in the world, converted to U.S. dollars.
Publicly traded stocks, bonds, and mutual funds at closing market price.
Real estate at home and abroad, appraised at fair market value.
Ownership stakes in private companies, partnerships, and LLCs. A formal business valuation is often needed and can run from a few hundred to tens of thousands of dollars depending on the entity.
Retirement accounts of all kinds, including IRAs, 401(k) plans, pensions, and foreign retirement arrangements.
Beneficial interests in trusts, valued under the gift tax rules.
Personal property of significant value, including jewelry, art, and vehicles.

The form also asks for the U.S. adjusted basis of each asset category. If you end up on the covered side of the threshold, the spread between basis and fair market value is what the exit tax is calculated on.

How Retirement Accounts Factor In

Retirement accounts count toward the $2 million total on the balance sheet, but their treatment under the exit tax splits into three separate regimes:⁴

Eligible deferred compensation plans, such as 401(k)s, pensions, and SEP-IRAs, escape the deemed sale. Distributions face mandatory withholding at the source once you have made an irrevocable waiver of any treaty-based withholding reduction and given the plan administrator Form W-8CE.
Specified tax-deferred accounts, including traditional and Roth IRAs, 529 plans, Coverdell accounts, HSAs, and Archer MSAs, are treated as fully distributed the day before expatriation for a covered expatriate. No early distribution penalty applies, but the entire balance lands in taxable income for the final year.⁵
Ineligible deferred compensation is treated as if you received the present value of the accrued benefit the day before expatriation, and that amount is taxed on the final return.

An $800,000 IRA held by a covered expatriate is added to taxable income for the departure year. That hit sits outside the mark-to-market regime and does not draw on its exclusion amount.

Two Other Ways to Become a Covered Expatriate

Net worth is only one of three independent tests. Failing any single one produces the same result, so a person below $2 million is not necessarily safe.¹

Average annual net income tax over the five tax years ending before your expatriation date exceeds $211,000 for 2026, adjusted annually for inflation.⁶
You fail to certify under penalty of perjury on Form 8854 that you have met all federal tax obligations for the five preceding tax years.

The certification test is the one that surprises people. You can have a modest net worth and small tax bills and still become a covered expatriate by failing to properly certify. The IRS is explicit that the exit tax applies regardless of whether the financial thresholds are met.⁷ Unfiled returns, unpaid balances, and missing FBARs all need to be cleaned up before your expatriation date; signing a false certification carries both tax and potential criminal exposure.

Exceptions for Dual Citizens and Minors

Two narrow carve-outs in 26 U.S.C. § 877A(g)(1)(B) let certain people bypass the net worth test and the tax liability test even when they would otherwise cross the thresholds:⁸

If you were a citizen of both the United States and another country at birth, and you remain a citizen of and taxed as a resident by that other country, you can avoid covered status provided you were a U.S. resident for no more than 10 of the 15 tax years ending with your expatriation year. Residency here uses the substantial presence test.
Individuals who relinquish U.S. citizenship before age 18½ qualify if they were U.S. residents for no more than 10 tax years before the date of relinquishment.

Neither exception removes the certification requirement. Five years of tax compliance still has to be certified on Form 8854.²

What Crossing the Threshold Actually Costs

A covered expatriate is treated as having sold all property for its fair market value on the day before the expatriation date. Any gain on that deemed sale is taxable, with one meaningful buffer: for 2026, the first $910,000 of total gain is excluded.⁶

The deemed sale covers stocks, real estate, business interests, and personal property. It does not cover eligible deferred compensation, specified tax-deferred accounts, or nongrantor trust interests, each of which follows the separate rules described above.

Consider a balance sheet with $4 million in fair market value and $1.5 million in basis. The deemed gain is $2.5 million. After the $910,000 exclusion, $1.59 million of gain is taxable at capital gains rates. That produces a six-figure liability before anything has actually been sold. You may elect to defer payment on certain assets by posting adequate security with the IRS, but the underlying tax does not go away.

The Tax That Follows You: Gifts and Bequests to U.S. Recipients

Covered expatriate status does not end at the border. Under 26 U.S.C. § 2801, any U.S. citizen or resident who later receives a gift or inheritance from a covered expatriate owes a tax equal to 40% of the value received.⁹ The rate matches the top federal estate and gift tax rate.¹⁰

The tax is owed by the recipient. A small annual exclusion applies; for 2026, the first $19,000 received per year from a covered expatriate is exempt, matching the regular gift tax annual exclusion.¹¹ Foreign gift or estate tax already paid on the same transfer reduces the amount owed, and transfers qualifying for the marital or charitable deduction are exempt.⁹

For families with U.S.-based children or other heirs, Section 2801 is often the most consequential long-term effect of covered status. A $5 million bequest to a U.S. child could generate roughly $2 million in tax that different planning before departure might have avoided.

Filing Form 8854

Everyone who expatriates must file Form 8854, whether or not they end up covered. The form attaches to your final tax return and reports the balance sheet, the basis figures, and the five-year certification.¹² A separate copy goes to the IRS processing center in Philadelphia; certified mail or an approved private delivery service is worth the small cost because the IRS generally does not confirm receipt.

Failing to file, or filing incomplete or incorrect information, carries a $10,000 penalty per year, waivable only on a showing of reasonable cause.¹³ Covered expatriates who elected the withholding regime for eligible deferred compensation have an ongoing annual Form 8854 filing obligation to report distributions received.

1
Office of the Law Revision Counsel. 26 USC 877 – Expatriation to Avoid Tax
2
Internal Revenue Service. Form 8854 – Initial and Annual Expatriation Statement
3
Internal Revenue Service. Expatriation On or After June 17, 2008 – Mark-to-Market Tax Regime
4
Internal Revenue Service. Instructions for Form 8854
5
Office of the Law Revision Counsel. 26 USC 877A – Tax Responsibilities of Expatriation
6
Internal Revenue Service. Revenue Procedure 2025-32
7
Internal Revenue Service. Expatriation Tax
8
Office of the Law Revision Counsel. 26 USC 877A – Tax Responsibilities of Expatriation – Section: Definitions and Special Rules Relating to Expatriation
9
Office of the Law Revision Counsel. 26 USC 2801 – Imposition of Tax
10
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
11
Internal Revenue Service. What’s New – Estate and Gift Tax
12
Internal Revenue Service. About Form 8854, Initial and Annual Expatriation Statement
13
Office of the Law Revision Counsel. 26 USC 6039G – Information With Respect to Certain Foreign Trust Beneficiaries and Expatriates