US Expatriation Exit Tax (IRC §877A): The Covered Expatriate Guide

If you're thinking about renouncing US citizenship — or if you hold a long-term green card and plan to abandon it — the IRC §877A exit tax is the one provision that can generate a massive US tax bill on assets you haven't sold and income you haven't received yet. Understanding whether you will be a "covered expatriate" and what that triggers should be the first planning question, not the last.

Who Is a "Covered Expatriate"?

§877A draws a sharp line between ordinary expatriates and covered expatriates. Ordinary expatriates who don't cross any threshold simply file Form 8854 once and walk away. Covered expatriates face mark-to-market taxation, IRA confiscation, deferred compensation withholding, and a special inheritance tax on gifts to US family members — potentially for the rest of their lives.

You are a covered expatriate if any one of these three tests is satisfied:

The compliance certification test catches more people than you might expect. If you lived abroad for years, earned foreign income, and didn't file FBARs or Form 8938 — even if you had no US tax due — you cannot certify compliance. You are automatically a covered expatriate. This is why filing FBAR and FATCA correctly every year is a prerequisite for a clean exit, not just an annual chore.

Green Card Holders: The 8-Year Rule

§877A applies to US citizens who relinquish citizenship and to "long-term residents" who abandon their green card. A long-term resident is a lawful permanent resident in at least 8 of the 15 years ending with the year of expatriation.

If you've held your green card for fewer than 8 of those 15 years, you are not subject to §877A. You simply file Form I-407 (Record of Abandonment of Lawful Permanent Resident Status), stop being a US tax resident, and your departure is treated as a change of residency under ordinary nonresident alien rules — no exit tax applies.

This makes the timing of green card abandonment a genuine planning decision. A green card holder approaching 8 years who is thinking about leaving might consider whether to depart slightly before crossing the 8-year threshold — or whether the §877A exit tax is preferable to continuing US tax exposure for another decade. Each situation is different.

Mark-to-Market: The Core Exit Tax Mechanism

If you are a covered expatriate, §877A(a)(1) treats all of your worldwide property as sold for fair market value on the day before your expatriation date. This is a deemed sale — you receive no cash. But you owe US tax on the resulting gain as if you had sold everything.

The statute provides a single exclusion to soften the impact: the first $910,000 of aggregate gain from the deemed sale is excluded from gross income (2026, indexed for inflation from a $600,000 base in 2008).¹ Gain above that amount is taxed at applicable capital gains rates — long-term for assets held over a year, ordinary income for short-term holdings.

What is included in the deemed sale?

• US brokerage accounts (stocks, bonds, ETFs, mutual funds)
• Foreign brokerage accounts and investments
• US real estate (fair market value, not just the gain above basis)
• Foreign real estate
• Business interests (partnerships, S-corporations, closely held corporations)
• Interests in trusts (with special look-through rules)

Three categories are excluded from the deemed sale and taxed under separate rules instead: deferred compensation items, specified tax-deferred accounts (IRAs), and interests in non-grantor trusts. These are covered in the following sections.

Basis step-up on the deemed sale

When a covered expatriate later sells an asset that was included in the deemed sale (for real, not just deemed), the basis of that asset is stepped up to the fair market value used in the deemed sale. You don't pay exit tax and then capital gains tax on the same appreciation — but the deemed-sale taxes must actually be paid for this step-up to apply.

IRAs and Specified Tax-Deferred Accounts

This is the provision that surprises covered expatriates most. Under IRC §877A(e)(1), the following accounts are treated as fully distributed on the day before expatriation:

• Traditional IRAs and Roth IRAs (IRC §7701(a)(37))
• Health Savings Accounts (§223)
• Coverdell Education Savings Accounts (§530)
• 529 education plans
• Archer MSAs (§220)

For a traditional IRA: the full fair market value is includible in gross income. If you have $800,000 in a traditional IRA, that $800,000 becomes ordinary income in the year of expatriation. The 10% early withdrawal penalty is waived for covered expatriates, but the ordinary income tax still applies — and that income piles on top of your other income, potentially pushing you to the 37% bracket.

For a Roth IRA: only the earnings (the amount above your contribution basis) are includible. Since Roth contributions were made with after-tax dollars, those contributions come out tax-free even on expatriation. Only the growth portion is taxed.

Deferred Compensation: Eligible vs. Ineligible

Employer-sponsored retirement plans are not deemed distributed on expatriation day (unlike IRAs). Instead, §877A(d) bifurcates them into two categories with very different treatment:

Eligible deferred compensation items

These are plans where the payor is a US person — primarily qualified 401(k)s, 403(b)s, and governmental 457(b) plans. On expatriation, you file an election with the plan administrator. Future distributions to you as a nonresident alien will be subject to 30% withholding (no treaty reduction — §877A overrides). Your 401(k) balance is not included in income today; it's taxed as it's paid out, but at a flat 30% rate. This is often more favorable than the IRA treatment.

Ineligible deferred compensation items

Anything else — non-qualified deferred compensation plans, foreign pension plans, deferred stock units with a foreign payor. These are treated as paid on the day before expatriation at present value, includible in gross income in the year of expatriation. If you have unvested foreign pension rights worth $400,000 in present value, that $400,000 is ordinary income the year you renounce.

Which bucket a plan falls into requires careful analysis. A UK SIPP with a US-citizen contributor can end up as ineligible deferred compensation depending on how it was structured — adding to the expatriation year ordinary income pile. This is one reason why the interaction of §877A with UK/EU pension plans requires specialist planning well before the intended expatriation date.

§2801: The Inheritance Tax on Gifts from Covered Expatriates

§877A doesn't just impose an exit tax on the covered expatriate. It also imposes a permanent tax on US persons who receive gifts or inheritances from covered expatriates after the expatriation date.

Under IRC §2801, a US recipient of a covered gift or covered bequest owes US tax at the highest applicable estate or gift tax rate (currently 40%) on the fair market value of what they receive, reduced by any gift or estate tax actually paid in a foreign country. The US recipient — not the covered expatriate — is the taxpayer. This means:

• If you renounce and later inherit from a parent who was a US citizen and became a covered expatriate, you may owe 40% tax on the bequest.
• If a covered expatriate parent gifts you money while living abroad, you owe §2801 tax on receipt.
• The §2801 tax applies even if the covered expatriate's estate would otherwise be below the OBBBA-adjusted $15M estate exemption — §2801 is a separate regime.²

There is a narrow exception: if the covered expatriate's estate is subject to US estate tax (because assets are US situs), the covered bequest amount is reduced by the estate tax paid on the same property. But in most cases, a non-domiciliary nonresident alien's estate is only subject to US estate tax on US-situs assets above $60,000 — meaning most covered bequests from a former US citizen who has severed domicile will not have offsetting US estate tax paid, and the §2801 tax hits the recipient at full force.

Form 8854: Filing Obligations

Every US citizen who relinquishes citizenship and every long-term resident who abandons a green card must file Form 8854 (Initial and Annual Expatriation Statement):

• Initial filing: Attached to the Form 1040 or 1040-NR for the year of expatriation. Reports the deemed sale calculation, IRA distributions, and deferred compensation elections.
• Annual filing: Required for covered expatriates who have ongoing deferred compensation arrangements subject to future distributions, until all such arrangements are fully paid out.
• The $10,000 penalty: Failure to file Form 8854 is a $10,000 penalty per year. The IRS has become more aggressive about this — expats who quietly renounced and never filed have received penalty notices years later.

Filing Form 8854 is completely separate from filing the FBAR (FinCEN 114) and Form 8938 (FATCA). All three may be required in the year of expatriation and, for FBARs, for any year you have signature authority over a foreign account.

Planning Strategies Before Expatriation

If your net worth is close to $2M or your annual US tax liability is approaching $211,000, there may be meaningful steps to reduce or eliminate covered expatriate status — but these require multi-year planning, not a call the week before you hand in your passport.

Address the compliance certification first

The certification test failure is the most avoidable. If you have unfiled FBARs or missed Form 8938 filings, the IRS Streamlined Filing Compliance Procedures (offshore or domestic) let you get into compliance with reduced penalties. Getting compliant removes one automatic path to covered expatriate status and is often the first step regardless of the other two tests.

Optimize the 5-year average tax liability

The net tax test looks at the average over 5 years, not just the most recent year. If you have several years below $211,000 and one outlier year (e.g., a large capital gain), the average may still come in under threshold. Deferring income into years that aren't in the 5-year lookback window, or accelerating deductions, can shift the average. FTC elections can also reduce net US tax owed — particularly if you're in a high-tax country where the FTC might reduce your US liability to zero.

Manage net worth to stay under $2M

The $2M net worth threshold has been fixed since 2008 — meaning inflation erodes it every year in real terms. If your assets are between $1.5M and $3M, getting a precise valuation of all assets (including foreign real estate and pension present values) before setting an expatriation date is critical. Some assets that are easy to overlook: unvested stock options (valued at intrinsic value, not Black-Scholes), deferred compensation at present value, interests in closely held businesses, and the present value of defined benefit pensions you're entitled to but haven't started receiving.

Roth conversions before IRA deemed distribution

If you expect to be a covered expatriate and have a large traditional IRA, converting to a Roth IRA before expatriation can change the tax treatment. A Roth IRA is still deemed distributed — but only the earnings (not basis) are taxable. If you convert while still a US tax resident, you pay ordinary income tax on the conversion, but those dollars then become Roth basis, reducing the §877A deemed-distribution inclusion. This trade-off requires careful modeling: Roth conversion income in the years before expatriation may itself increase your average annual net tax liability, potentially crossing the $211,000 threshold.

Gifting assets to a non-US spouse before expatriation

The unlimited marital deduction doesn't apply to transfers to a non-citizen spouse — but the annual gift exclusion for non-citizen spouses is $194,000 in 2026. For a married couple where the spouse is not a US citizen, systematic gifting in the years before expatriation can shift assets and reduce the covered expatriate's net worth. Gifts to a non-citizen spouse exceeding the annual exclusion require a gift tax return but use the lifetime exemption (currently $15M under OBBBA). After expatriation, however, the §2801 tax makes future transfers to any US person more expensive.

Who Needs a Specialist

The US exit tax analysis isn't a spreadsheet problem. It requires:

• A complete net worth calculation under §877A standards — including pension present values, foreign real estate at fair market value, and deferred stock units
• 5-year average net tax calculation using actual filed returns and any FTC carryover adjustments
• Identification of all deferred compensation items and whether they are eligible or ineligible under §877A(d)
• IRA and Roth conversion modeling
• §2801 estate planning — structuring future transfers to US family members to minimize tax
• Form 8854 preparation and filing, including the deemed-sale worksheet and elections
• Coordination with US and host-country tax counsel on the treaty tiebreaker, domicile change, and any stepped-up basis claims