US Exit Tax — Covered Expatriate Screen

The US exit tax under IRC §877A applies to "covered expatriates" — US citizens who renounce citizenship and long-term green card holders who abandon their status. If you are covered, your worldwide assets are deemed sold at fair market value the day before expatriation, and gains above an indexed exclusion are taxed at capital gains rates. Special rules apply to deferred compensation and trust interests.

You are a covered expatriate if you fail any one of three tests: (1) your worldwide net worth on the date of expatriation is $2,000,000 or more; (2) your average annual net US income tax for the five preceding years is $206,000 or more (2025 indexed amount); or (3) you cannot certify that you have complied with all US tax obligations for the five preceding years. The compliance test is the most commonly overlooked.

To pass the compliance test, you must certify under penalty of perjury on Form 8854 that you have filed all required US tax returns and paid all taxes due for the five years before expatriation. This includes information returns such as FBARs, Form 8938, and Form 5471. A missed FBAR or foreign company return can make you a covered expatriate even if your income and wealth are below the other thresholds.

Yes, substantially. The timing of expatriation relative to asset values, the order in which assets are sold or restructured before expatriation, use of the mark-to-market exclusion, and elections on deferred compensation can all reduce the impact. Planning 1–3 years before the intended renunciation date gives the most options.

Under Section 2801, US persons who receive gifts or bequests from a covered expatriate after expatriation pay a covered gift or bequest tax at the highest estate or gift tax rate. This applies even if the covered expatriate has no other US connection — a significant and often overlooked consequence for mixed US/non-US families.