Expatriation Tax Under IRC Section 877A: Covered Expatriates, Form 8854

The expatriation tax under IRC Section 877A is a one-time exit tax on U.S. citizens who renounce their citizenship and on long-term green card holders who give up permanent residency. It applies only to individuals classified as “covered expatriates,” and it works by pretending you sold every asset you own worldwide the day before you left, then taxing the built-in gain above an inflation-adjusted exclusion.¹ Not everyone who leaves owes it, but everyone who leaves has to file for it.

Who Counts as a Covered Expatriate

The tax only bites if you are a covered expatriate. You become one by failing any single one of three tests. A long-term resident, for this purpose, is someone who held a green card in at least 8 of the last 15 tax years.¹

Net Worth of $2 Million or More

If your worldwide net worth on the date of expatriation is $2 million or more, you are covered. Every asset counts at current fair market value — real estate, securities, private business interests, cash, retirement accounts — reduced by your debts.² Original cost doesn’t matter here.

Average Annual U.S. Income Tax Above the Threshold

This test looks at the actual federal income tax you paid, averaged over the five years ending before your expatriation date. For 2026, the threshold is $211,000.³ The figure adjusts each year for inflation, so anyone planning several years out should check the number for the actual year of departure.

Failure to Certify Five Years of Tax Compliance

Even with modest assets and modest tax bills, you become a covered expatriate if you cannot certify — under penalty of perjury on Form 8854 — that you complied with every federal tax obligation for the five years before you left.⁴ A missed FBAR from four years ago or an overlooked foreign corporation information return is enough to trip this test. This is the trap that catches people who assumed they were safely under the wealth thresholds.

Narrow Exceptions for Certain Dual Citizens and Minors

Two exceptions can waive covered status even if you would otherwise fail the wealth or tax-liability tests. Someone who was born a dual citizen of the United States and another country can avoid covered status if, on the expatriation date, they are taxed as a resident of that other country and have not lived in the United States for more than 10 of the 15 tax years ending with departure.¹ A parallel exception applies to anyone who expatriates before age 18½ and who has not been a U.S. resident for more than 10 tax years.²

Both exceptions still require passing the five-year compliance certification on Form 8854. The wealth and tax-liability tests are waived; the clean-filings requirement is not.

How the Tax Is Calculated

If you are covered, the IRS treats all of your worldwide property as if it were sold on the day before your expatriation date at fair market value. The resulting gain is the difference between that value and your adjusted basis in each asset.¹

Long-term residents get an important benefit. Property you owned on the day you first became a U.S. resident receives a basis equal to its fair market value on that date, so the IRS does not tax gains that built up before you entered the U.S. tax system. You can elect to forgo the step-up, but that election is irrevocable and only makes sense if you have built-in losses worth preserving.¹

The law provides an inflation-adjusted exclusion that reduces the total gain from the deemed sale. For 2026 it is $910,000; for 2025 it was $890,000. The exclusion is allocated pro rata across all appreciated assets, so it doesn’t simply shield the first $910,000 — it trims the gain on each gaining asset in proportion.¹

What remains after the exclusion is taxed as capital gain. Long-term capital gains rates go up to 20 percent, and the 3.8 percent net investment income tax stacks on top, so the effective rate on the excess can reach 23.8 percent. That is a real cash bill triggered by a change in legal status, not by any actual sale.

Retirement Accounts, Deferred Compensation, and Trusts

Certain assets sit outside the mark-to-market rule and have their own regime.¹

Deferred Compensation

Deferred compensation splits into two buckets. “Eligible” deferred compensation exists where the payer is a U.S. person (or elects to be treated as one) and the expatriate irrevocably waives treaty reductions in withholding. Nothing is due at departure; instead, the payer withholds 30 percent from every future distribution.

“Ineligible” deferred compensation, typically a foreign pension with a non-U.S. payer, is treated as received in full on the day before expatriation. The present value of all accrued benefits is included in ordinary income on the final U.S. return, which can push the taxpayer into the top bracket and generate a cash bill on money that won’t actually arrive for years.

IRAs and Other Specified Tax-Deferred Accounts

For IRAs, 529 plans, health savings accounts, Coverdell accounts, and Archer MSAs, the entire account balance is treated as distributed the day before expatriation. The full amount is included in income. The early-distribution penalty does not apply, and later actual distributions are adjusted so the same dollars aren’t taxed twice.¹

Nongrantor Trust Interests

A beneficial interest in a nongrantor trust is not subject to the deemed sale. The trustee instead withholds 30 percent of the taxable portion of every future distribution to the covered expatriate. The expatriate has to notify the trustee of covered status by filing Form W-8CE, and the trustee’s withholding duty runs regardless of whether notice was given.⁵

The 40 Percent Tax on U.S. Recipients of Gifts and Bequests

Section 877A isn’t the only exit consequence. Under IRC Section 2801, a U.S. citizen or resident who receives a gift or inheritance from a covered expatriate owes a tax at the top estate tax rate — currently 40 percent — on the value received.⁶⁷ The recipient pays, not the expatriate. For 2026, the first $19,000 in covered gifts received per calendar year is excluded.⁸

A transfer is not a “covered gift or bequest” if the expatriate reported it on a timely filed U.S. gift tax return, or if it would qualify for the charitable or marital deduction had the donor been a U.S. person.⁶ A credit is available for gift or estate tax paid to a foreign country on the same transfer. Distributions from a domestic trust holding covered-gift property are taxed at the trust level; foreign trusts trigger the 40 percent tax when distributions attributable to a covered gift reach a U.S. beneficiary. Recipients report and pay on Form 708.⁹

If you plan to leave money to family who remain in the United States, this 40 percent charge sits on top of whatever exit tax you pay yourself.

Filing Form 8854 and Fixing the Expatriation Date

Every expatriating individual, covered or not, files Form 8854 with the final-year tax return. The form requires a global balance sheet by asset category, cost basis figures, and the five-year compliance certification.⁴ Real estate, closely held business interests, and collectibles usually need professional appraisals to support their reported values.

Form 8854 is attached to a dual-status return: Form 1040 for the U.S.-resident part of the year, paired with Form 1040-NR for the nonresident remainder. The penalty for failing to file, filing incomplete, or filing with incorrect information is $10,000 per year, absent reasonable cause.¹⁰

The expatriation date anchors every valuation and every deadline, so pinning it down matters. For citizens, it is generally the date of appearance before a consular officer to renounce and receive a Certificate of Loss of Nationality.¹¹ For long-term residents, it is the date Form I-407 is filed to abandon the green card, or the date the individual begins being treated as a resident of a foreign country under a tax treaty.

Annual Filings After You Leave

Form 8854 obligations don’t necessarily end at departure. If you elected to defer the exit tax on any asset, hold eligible deferred compensation, or take distributions from a nongrantor trust, you file Form 8854 every year until the deferred tax and interest are paid or the ongoing withholding stops. Each annual filing reports dispositions of deferred-tax property, distributions received, and withholding. The same $10,000 penalty applies to each missed annual form.⁴

Electing to Defer the Exit Tax

You do not have to pay the entire exit tax the year you leave. IRC Section 877A(b) allows an asset-by-asset election to defer the tax on specific property until that property is actually sold or otherwise disposed of.¹ That flexibility lets you pay currently on liquid holdings and defer on illiquid ones like real estate or a private company stake.

Two conditions apply. You must post adequate security, generally a bond under IRC Section 6325 or an irrevocable letter of credit. And you must waive any treaty protections that would otherwise limit U.S. taxing authority over the deferred gain. The IRS will not honor the election without both.

Interest accrues from the original due date of the return, not from the eventual sale, at the underpayment rate under IRC Section 6601 (federal short-term rate plus three percentage points). Over a long deferral, that interest becomes a meaningful cost on top of the underlying tax, and you keep filing Form 8854 every year until the deferred obligation clears.⁴

1
Office of the Law Revision Counsel. 26 USC 877A – Tax Responsibilities of Expatriation
2
U.S. Embassy & Consulates. U.S. Tax Consequences of Expatriation
3
Internal Revenue Service. Expatriation Tax
4
Internal Revenue Service. Instructions for Form 8854
5
Internal Revenue Service. Form W-8CE
6
Office of the Law Revision Counsel. 26 USC 2801 – Imposition of Tax
7
Office of the Law Revision Counsel. 26 USC 2001 – Imposition and Rate of Tax
8
Internal Revenue Service. What’s New – Estate and Gift Tax
9
Internal Revenue Service. About Form 708, United States Return of Tax for Gifts and Bequests Received From Covered Expatriates
10
Office of the Law Revision Counsel. 26 USC 6039G – Information on Individuals Losing United States Citizenship
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eCFR. 22 CFR Part 50 Subpart C – Loss of Nationality