What is a covered expatriate?

A covered expatriate is someone who meets any of three tests on the date of expatriation: (1) Average annual net income tax for the 5 years ending before expatriation exceeds $206,000 (2026, indexed), (2) Net worth is $2 million or more, or (3) Failure to certify compliance with all federal tax obligations for the 5 preceding years. Covered expatriates are subject to the exit tax.

What is the exit tax?

The exit tax treats a covered expatriate as if they sold all worldwide assets the day before expatriation. Gains are taxed at capital gains rates, but the first $866,000 of gain is excluded (2026, indexed). The tax applies to unrealized gains on stocks, bonds, real estate, business interests, and most other property. Certain assets (IRAs, 529 plans, deferred compensation, specified tax-deferred accounts) are subject to special rules.

Can I avoid the exit tax?

You can avoid covered expatriate status (and thus the exit tax) if: (1) your 5-year average tax liability is below $206,000, (2) your net worth is below $2 million, and (3) you certify tax compliance for the prior 5 years. If you are close to the net worth threshold, gifting assets to a US citizen spouse or charity before expatriation may help, but complex rules apply to prevent last-minute avoidance.

Do I still file US taxes after renouncing?

Generally no, if you are not a covered expatriate and have no US source income. However, covered expatriates may have ongoing filing obligations for deferred compensation, ineligible deferred compensation, and specified tax-deferred accounts. Non-resident aliens with US source income must file Form 1040-NR.

Form 8854: Initial and Annual Expatriation Statement

Form 8854 is the form that stands between you and a clean break from the US tax system. If you are renouncing citizenship or giving up a long-term green card, Form 8854 is how you certify your tax compliance and calculate whether you owe the exit tax. For covered expatriates — those with high income, high net worth, or compliance gaps — the consequences can be life-altering. This guide explains who must file, how the exit tax works, and what you can do to plan around it.

Who Must File Form 8854?

You must file Form 8854 if you are an expatriate, defined as:

1. Renunciation of US Citizenship

You voluntarily renounce your US citizenship before a US diplomatic or consular officer abroad. This is the most common expatriation scenario for Americans abroad.

2. Relinquishment of Citizenship

You take an affirmative action that results in loss of citizenship (e.g., serving in a foreign military, taking a policy-level position in a foreign government, or formally renouncing at a US consulate).

3. Long-Term Permanent Resident

You cease to be a lawful permanent resident (green card holder) after holding the status for at least 8 of the 15 tax years ending with the year you abandon status. This includes:

Filing Form I-407 to abandon permanent resident status
Having your green card revoked by USCIS
Being found to have abandoned residence by an immigration judge

Not expatriates: Green card holders who held status for fewer than 8 years are not long-term residents and do not file Form 8854 (though they may have other tax obligations).

The Covered Expatriate Tests

The exit tax applies only to "covered expatriates." You are a covered expatriate if you meet any of the following three tests on the date of expatriation:

Test 1: Tax Liability

Your average annual net income tax liability for the 5 tax years ending before the year of expatriation exceeds $206,000 (for 2026, indexed annually).

Calculation: Add your net income tax for the 5 prior years and divide by 5. Exclude self-employment tax if you claimed a Totalization Agreement exemption.

Test 2: Net Worth

Your net worth is $2 million or more on the date of expatriation.

Calculation: Include all worldwide assets at fair market value, minus liabilities. Assets include:

Real estate
Bank and investment accounts
Retirement accounts
Business interests
Trust interests
Personal property

Exclusion: Certain property transferred to a US citizen spouse or charity within a specified period may be excluded, but anti-abuse rules apply.

Test 3: Tax Compliance

You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 preceding tax years.

Important: This is a certification, not an objective test. If you have unfiled returns, unpaid taxes, or unresolved audits, you cannot make the certification and are automatically a covered expatriate.

The Exit Tax: How It Works

If you are a covered expatriate, the exit tax applies as if you sold all your worldwide assets the day before expatriation.

Deemed Sale

Each asset is treated as sold at fair market value:

Capital assets: Gains are taxed at capital gains rates (0%, 15%, or 20%)
First $866,000 of gain is excluded (2026, indexed annually)
Losses: May offset gains, but the $866,000 exclusion applies to net gain

Special Asset Rules

Asset Type	Treatment
Deferred compensation (pensions, 401(k), IRAs)	Taxed as if distributed on the day before expatriation; 30% withholding applies to future distributions
Specified tax-deferred accounts (HSAs, 529s, Coverdell ESAs)	Treated as distributed immediately; taxed at ordinary rates
Ineligible deferred compensation (non-qualified plans, foreign pensions without treaty benefits)	Not taxed at expatriation, but future distributions to a non-resident alien are subject to 30% withholding
Interest in non-grantor trusts	Treated as if the entire interest was sold; complex valuation rules apply

Example Calculation

Imagine a covered expatriate with the following assets:

Brokerage account with $500,000 unrealized gain
Foreign real estate with $300,000 unrealized gain
IRA with $400,000 balance

Exit tax:

Capital gains: $800,000 - $866,000 exclusion = $0 (exclusion covers all)
IRA deemed distribution: $400,000 taxed at ordinary rates (assume 35%) = $140,000

Total exit tax: $140,000

Filing Form 8854

When to File

Form 8854 is filed with your tax return for the year of expatriation:

By the normal due date (April 15, June 15 for expats, or October 15 with extension)
If you expatriate mid-year, you file a dual-status return

Parts of Form 8854

Part I: General information — date of expatriation, citizenship status, address

Part II: Balance sheet — worldwide assets and liabilities at fair market value

Part III: Certification of tax compliance — check the box confirming 5 years of compliance

Part IV: Tax liability test — calculate your 5-year average tax

Part V: Deferred compensation — list all deferred compensation items

Part VI: Specified tax-deferred accounts — list HSAs, 529s, etc.

Part VII: Gains and losses from deemed sale — calculate the exit tax

Dual-Status Return

If you expatriate mid-year, you file as:

US resident for the portion of the year before expatriation
Non-resident alien for the portion after expatriation

This requires splitting income and deductions between the two periods and attaching a statement explaining the allocation.

Planning Strategies

Pre-Expatriation Planning

1. Accelerate Income

Recognize capital gains in years before expatriation to reduce future deemed sale gains
Consider Roth conversions before expatriation

2. Gift Assets

Transfer assets to a US citizen spouse or charity to reduce net worth below $2 million
Must be done in accordance with anti-abuse rules; last-minute gifting may be disregarded

3. Compliance Cleanup

File any missing returns before expatriation
Resolve outstanding audits or disputes
Enter into payment plans for unpaid taxes

4. Pension Planning

Evaluate whether to roll over or distribute retirement accounts before expatriation
Consider treaty benefits for foreign pensions

Post-Expatriation Obligations

Even after expatriation:

US source income: Subject to US tax; file Form 1040-NR
Deferred compensation distributions: Subject to 30% withholding
Real property gains: Subject to FIRPTA withholding on sale

Special Situations

Accidental Americans

Accidental Americans (those born in the US to foreign parents or born abroad to US parents who never filed) are increasingly renouncing to escape FATCA reporting and banking restrictions. Many have minimal US assets and income, so they are not covered expatriates. However, the compliance certification requirement can be problematic if they have never filed US returns.

Streamlined Filing: Accidental Americans can often use the Streamlined Foreign Offshore procedures to come into compliance before expatriation, enabling them to make the compliance certification.

Green Card Holders

Green card holders who abandon status before the 8-year threshold are not long-term residents and do not file Form 8854. However, they may still be subject to the exit tax under different rules if they meet the substantial presence test after abandonment.

Minor Children

Children who expatriate before age 18.5 are generally exempt from the covered expatriate tests if they have been tax residents for no more than 10 years.

Penalties

Failure to file Form 8854: $10,000 penalty
False certification: Criminal penalties, including fines and imprisonment
Underpayment of exit tax: Accuracy-related penalties (20%) and interest

When to Get Help

Exit tax planning is not DIY territory. You should consult a specialist if:

You are considering renouncing citizenship or abandoning a green card
Your net worth is close to or above $2 million
Your average tax liability is close to or above $206,000
You have deferred compensation, retirement accounts, or trust interests
You have any compliance gaps in the prior 5 years
You are an accidental American who has never filed US taxes

FileAbroad's Complex Expat Return includes exit tax analysis, Form 8854 preparation, and pre-expatriation planning. Start your free intake to discuss your situation.