A covered expatriate is a U.S. citizen who renounces citizenship, or a long-term green card holder who ends U.S. residency, and who trips at least one of three tests on the day they leave: a net worth of $2 million or more, an average annual federal income tax bill above an inflation-adjusted threshold ($211,000 for 2026), or an inability to certify five years of full U.S. tax compliance.1Internal Revenue Service. Expatriation Tax Meeting any one of those tests is enough. The label carries an exit tax on worldwide assets, special rules for retirement accounts and pensions, and a 40% tax that follows the expatriate’s later gifts and bequests into the hands of any U.S. recipient.
Who the Rules Apply To
Two groups can fall into covered expatriate status. The first is any U.S. citizen who renounces before a consular officer or otherwise formally relinquishes citizenship. The second is long-term residents: green card holders who held lawful permanent resident status in at least 8 of the 15 tax years ending with the year they give it up.1Internal Revenue Service. Expatriation Tax Someone who has held a green card for a decade and turns it in is almost certainly a long-term resident for these purposes.
For a long-term resident, the status ends when the government formally revokes or treats the green card as abandoned, or when the person begins claiming treaty-based residency in another country and notifies the IRS on Forms 8833 and 8854.1Internal Revenue Service. Expatriation Tax For a citizen, the expatriation date is generally the date of renunciation or another formal act of relinquishment.
The Three Tests
You are a covered expatriate if any one of the following is true on your expatriation date. Hitting two or three changes nothing; one trigger is enough.
The Net Worth Test
If your net worth is $2 million or more, you are covered.2Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation Net worth here means the fair market value of everything you own anywhere in the world (real estate, investments, business interests, retirement accounts, personal property) minus your liabilities. Substantial home equity combined with a retirement account can put someone over this line without any sense of being wealthy. The $2 million figure is not adjusted for inflation.
The Tax Liability Test
This test looks at your average annual net federal income tax over the five tax years before you expatriate. For 2026 expatriations the threshold is $211,000; it was $206,000 for 2025 and $201,000 for 2024.3Internal Revenue Service. Revenue Procedure 2025-321Internal Revenue Service. Expatriation Tax What matters is the tax you actually owed, not gross income. A high earner with heavy deductions can stay below the threshold; a more modest earner with fewer deductions can exceed it.
The Certification Test
Everyone who expatriates must certify on Form 8854, under penalty of perjury, that they have satisfied all federal tax obligations for the five years before the expatriation date. If you cannot make that certification, or you simply fail to file the form, you become a covered expatriate automatically regardless of your net worth or income history.1Internal Revenue Service. Expatriation Tax Old unfiled returns, unreported foreign accounts, and missed FBAR filings are the usual reasons people fail this test without expecting to.
Narrow Exceptions for Some Dual Citizens and Minors
Two statutory exceptions can keep someone out of covered expatriate status even after tripping one of the tests, but both are narrow.
A person born a citizen of both the United States and another country can avoid the label if two things are true on the expatriation date: they are still a citizen and tax resident of that other country, and they have not been a U.S. resident for more than 10 of the last 15 tax years.2Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation Both conditions must hold. A dual-citizen-at-birth who spent 12 of the last 15 years in the U.S. does not qualify.
Someone who relinquishes U.S. citizenship before age 18½ can also avoid the label, provided they have not been a U.S. resident for more than 10 tax years before the relinquishment date.2Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation This tends to apply to children born abroad to U.S. citizen parents who never spent much time in the States.
Either exception still requires filing Form 8854 and certifying five years of tax compliance. Skip the certification and you become a covered expatriate anyway.
The Exit Tax on Worldwide Assets
A covered expatriate is treated as having sold every asset they own worldwide at fair market value on the day before expatriation.2Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation No sale actually happens; the IRS calculates the gain as if one had, and taxes it.
The first slice of that deemed gain is excluded. For 2026 expatriations the exclusion is $910,000; it was $890,000 for 2025 and $866,000 for 2024.3Internal Revenue Service. Revenue Procedure 2025-321Internal Revenue Service. Expatriation Tax Gain above the exclusion is taxed at the capital gains rate that would have applied to that asset. The exit tax is generally due by the filing deadline for the expatriation-year return, extensions included. A property-by-property deferral election is available in exchange for posting security and waiving relevant treaty rights, with interest accruing until each asset is sold.2Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation
Retirement Accounts and Deferred Compensation
Three categories of assets skip the mark-to-market treatment and follow their own rules: deferred compensation, specified tax-deferred accounts, and interests in nongrantor trusts.4Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation
Specified tax-deferred accounts include IRAs, 529 plans, Coverdell education savings accounts, ABLE accounts, health savings accounts, and Archer MSAs. The entire balance is treated as distributed to you the day before you expatriate, becoming taxable income in that year, though the early-distribution penalty that would normally hit withdrawals before age 59½ is waived.4Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation A large traditional IRA can generate a significant income tax bill even though no money actually leaves the account.
Eligible deferred compensation from a U.S. employer, such as pensions and deferred bonuses, is handled differently. Each future payment to the covered expatriate is subject to a flat 30% withholding tax, with the payer responsible for withholding and remitting.2Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation
The 40% Tax on U.S. Recipients of Gifts and Bequests
Covered expatriate status reaches beyond the expatriate. Under Section 2801, any U.S. citizen or resident who later receives a gift or inheritance from a covered expatriate owes a tax at the top federal estate tax rate, currently 40%, on the value received.5Office of the Law Revision Counsel. 26 U.S. Code 2801 – Imposition of Tax The tax falls on the U.S. recipient, not the expatriate.
Several transfers are outside the tax. Amounts up to the annual gift tax exclusion ($19,000 per calendar year for 2026) are exempt.6Internal Revenue Service. Instructions for Form 708 Transfers to a spouse or charity that would qualify for the marital or charitable deduction are excluded. Any foreign gift or estate tax paid on the same transfer can be credited against the Section 2801 tax.5Office of the Law Revision Counsel. 26 U.S. Code 2801 – Imposition of Tax
Final regulations took effect January 14, 2025, and apply to covered gifts and bequests received on or after January 1, 2025. The U.S. recipient reports and pays the tax on Form 708 for each calendar year in which such transfers arrive.6Internal Revenue Service. Instructions for Form 708 A U.S. child who receives a birthday check from an expatriated parent can owe 40% on anything above the annual exclusion, and the reporting burden sits with the child.
Form 8854 and the $10,000 Penalty
Every person who expatriates, covered or not, has to file Form 8854, the Initial and Annual Expatriation Statement.1Internal Revenue Service. Expatriation Tax The form notifies the IRS of the expatriation, provides the five-year tax compliance certification, and, for covered expatriates, is where the exit tax is calculated and any deferral elections are made.
The form requires personal information, the date and method of expatriation, and a full balance sheet of worldwide assets and liabilities at fair market value as of the day before the expatriation date.7Internal Revenue Service. Instructions for Form 8854 It attaches to the income tax return for the year of expatriation and is due by that return’s deadline, extensions included. Someone not otherwise required to file a return still has to send in Form 8854 by the date a return would have been due.4Office of the Law Revision Counsel. 26 U.S. Code 877A – Tax Responsibilities of Expatriation Annual filings continue in later years if tax has been deferred or deferred compensation was reported.
Failing to file, filing late, or filing an incomplete or incorrect Form 8854 carries a $10,000 penalty per year unless the failure was due to reasonable cause and not willful neglect.7Internal Revenue Service. Instructions for Form 8854 That penalty sits on top of the automatic covered expatriate classification that comes from missing the compliance certification, so a single skipped form can trigger the exit tax and a five-figure penalty at the same time.