Exit Tax and Expatriation: Form 8854 Filing for Americans Giving Up Citizenship

Renouncing US citizenship or abandoning a long-term green card is one of the most significant tax events a person can trigger. The exit tax under IRC Section 877A treats covered expatriates as if they sold all their worldwide assets the day before leaving the US tax system. For wealthy individuals, this can generate a seven-figure tax bill on gains they never realized.

This guide explains who the exit tax applies to, how it is calculated, what assets are caught, and how to file Form 8854.

Why the Exit Tax Exists

The exit tax was created in 2008 to replace the older regime that continued to tax expatriates for 10 years after departure. Congress was concerned that wealthy Americans were moving to low-tax countries and avoiding US tax on gains that accumulated while they enjoyed the benefits of US citizenship or residency.

The new exit tax says: If you leave, you pay tax on your unrealized gains before you go.

Who Is a Covered Expatriate?

Not everyone who renounces citizenship pays the exit tax. Only covered expatriates are subject to the deemed sale. You are a covered expatriate if you meet any one of three tests:

Test 1: Average Annual Net Income Tax

Your average annual net income tax liability for the five years ending before expatriation exceeds a threshold:

• 2026 threshold: $201,000 (indexed for inflation annually)
• This is the actual tax you paid, not your gross income.

Test 2: Net Worth

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

• Net worth = worldwide assets minus worldwide liabilities.
• Includes real estate, investments, business interests, retirement accounts, and personal property.
• Does not include certain pension rights that are taxed at distribution instead.

Test 3: Tax Compliance Certification

You fail to certify on Form 8854 that you have met all US federal tax obligations for the five years preceding expatriation.

• This is the "catch-all" test. Even if your income is low and your net worth is modest, if you have not filed tax returns or paid tax for the prior five years, you are a covered expatriate.

Exceptions

Two groups are exempt from covered expatriate status regardless of the tests:

1. Dual citizens from birth who have not been US residents for more than 10 of the last 15 years.
2. Individuals who relinquished citizenship before age 18½ and were not US residents for more than 10 years.

How the Exit Tax Works

If you are a covered expatriate, you are treated as if you sold all your worldwide assets for their fair market value on the day before expatriation.

The Deemed Sale

For each asset, you calculate:

• Fair market value on the day before expatriation.
• Adjusted basis (what you paid for it, plus improvements, minus depreciation).
• Deemed gain or loss = FMV – Adjusted basis.

The $813,000 Exclusion (2026)

Net capital gains from the deemed sale are reduced by an exclusion amount:

• 2026 exclusion: $813,000 (indexed for inflation).
• Only gains above this threshold are taxed.
• The exclusion applies to the net gain across all assets, not per asset.

Example:

• Total deemed gains: $1,500,000
• Total deemed losses: $200,000
• Net deemed gain: $1,300,000
• Exclusion: $813,000
• Taxable deemed gain: $487,000
• Tax at 20% long-term capital gains rate: $97,400

What Is Taxed

The deemed sale applies to almost everything:

• Stocks and securities (US and foreign).
• Real estate (US and foreign).
• Business interests (sole proprietorships, partnerships, corporations).
• Personal property above certain thresholds.
• Cryptocurrency and digital assets.

What Is Not Taxed (Special Rules)

Certain assets receive special treatment:

Eligible Deferred Compensation

Rather than deemed sale, these are taxed when actually distributed. The payor must withhold 30% of each taxable distribution:

• 401(k) and pension plans.
• Certain stock option and deferred bonus plans.

Ineligible Deferred Compensation

Treated as received immediately before expatriation (taxed as a deemed distribution).

Non-Grantor Trusts

Interests in non-grantor trusts are taxed at distribution, with 30% withholding.

Specified Tax-Deferred Accounts

Treated as distributed immediately:

• Traditional IRAs.
• Health Savings Accounts (HSAs).
• 529 plans.
• Coverdell ESAs.

Form 8854: The Expatriation Statement

Form 8854 must be filed by all individuals who expatriate, regardless of whether they are covered expatriates.

Part I: Identification and Covered Expatriate Status

• Name, SSN, date of expatriation.
• Certification of five-year tax compliance.
• Calculation of the three tests (income tax, net worth, compliance).

Part II: Deemed Sale Calculation

• List of all assets subject to deemed sale.
• FMV, adjusted basis, and gain/loss for each asset.
• Application of the $813,000 exclusion.
• Calculation of tax due.

Part III: Deferred Compensation and Trust Interests

• Identification of eligible and ineligible deferred compensation.
• Trust interest reporting.
• Waiver of treaty benefits (if applicable).

Filing Deadline

Form 8854 is due by the due date of your tax return for the year of expatriation, including extensions.

Penalties

• $10,000 for failure to file Form 8854.
• The statute of limitations on your entire tax return remains open indefinitely if Form 8854 is not filed.

Timing and Planning Considerations

Before Expatriation

1. Review the three tests: Calculate your average tax, net worth, and compliance history at least 2–3 years before expatriation.
2. File missing returns: If you are not compliant, use the Streamlined Foreign Offshore Procedures to catch up before expatriating.
3. Value assets: Obtain appraisals for real estate, businesses, and illiquid assets.
4. Consider accelerating income: If you have control over bonus timing or stock option exercises, consider realizing income in years before expatriation to reduce future deemed gains.
5. Gifting strategy: Gifts to reduce net worth must be made more than 3 years before expatriation to avoid the special gift tax rules for covered expatriates.

During Expatriation

1. Coordinate with the State Department: For citizenship renunciation, you must appear at a US embassy or consulate, pay the $2,350 fee, and receive a Certificate of Loss of Nationality.
2. Determine the expatriation date: This is generally the date the Certificate of Loss of Nationality is issued, or the date of green card abandonment.
3. File Form 8854 with your final tax return.

After Expatriation

1. US-sourced income is still taxable: Even after expatriation, income from US sources (rental property, US business, US dividends) is still subject to US tax.
2. 30% withholding on deferred compensation: Distributions from US pension plans may be subject to 30% withholding.
3. Successor tax: If you die within 10 years of expatriation and leave assets to US persons, your estate may owe US estate tax (for covered expatriates).

Common Scenarios

Scenario 1: The High-Net-Worth Retiree

You have a net worth of $5 million, including a $2 million home in Spain, $1.5 million in a US brokerage account, $1 million in a UK SIPP, and $500,000 in other assets. You want to renounce citizenship to simplify your tax life. You are a covered expatriate under the net worth test. The deemed sale applies to your Spanish home, US brokerage account, and other assets. The UK SIPP is treated as deferred compensation and taxed at distribution with 30% withholding. Your exit tax could be $200,000–$400,000 depending on your basis.

Scenario 2: The Accidental American

You were born in the US to Canadian parents and left as an infant. You have never filed a US tax return. You discover your US citizenship when applying for a mortgage in Canada. You want to renounce. You are likely a covered expatriate under the compliance test because you have not filed for five years. You must catch up using the Streamlined Foreign Offshore Procedures before expatriating to avoid covered expatriate status.

Scenario 3: The Long-Term Green Card Holder

You have held a green card for 20 years and want to return to your home country. You have a net worth of $1.5 million and average annual tax of $50,000. You are not a covered expatriate under the income or net worth tests, but if you have not filed tax returns for the past five years, you are covered under the compliance test. File your missing returns before abandoning the green card.

How FileAbroad Handles Expatriation

Expatriation planning is one of FileAbroad's most sensitive and complex services. We provide:

• Covered expatriate analysis: We calculate your net worth, average tax, and compliance status to determine whether you are a covered expatriate.
• Pre-expatriation planning: We model the exit tax under different scenarios and recommend strategies to minimize it.
• Asset valuation coordination: We work with appraisers to value real estate, businesses, and illiquid assets.
• Form 8854 preparation: We prepare and file Form 8854 with your final tax return.
• Post-expatriation compliance: We advise on ongoing US tax obligations for US-sourced income and deferred compensation.
• Streamlined catch-up: If you are not compliant, we use the Streamlined procedures to clean up your filing history before expatriation.

For expatriation planning, start with the free intake and describe your citizenship status, assets, and timeline.