As the global landscape becomes more interconnected, the financial and political implications of renouncing U.S. citizenship or permanent resident status have taken on new significance.  In recent years, growing economic pressures, changing tax laws, and the increasingly complex nature of international finance have prompted a rising number of Americans to consider expatriation or relinquishing their green cards.  The political climate in the U.S. adds a layer of complexity to this decision.  With this decision comes a lesser-known but critical financial reality—the U.S. Exit Tax.  In the context of a rapidly evolving U.S. tax code, volatile political shifts, and heightened scrutiny of global wealth, understanding the nuances of the Exit Tax and its long-term consequences is more important than ever.  Whether driven by personal, financial, or political reasons, the decision to sever ties with the U.S. can be fraught with challenges that extend far beyond paperwork and passport renunciation.  This article dives deep into what the U.S. Exit Tax entails, who it affects, and how it fits into the broader conversation about expatriation in today’s world.

Expatriation and U.S. Exit Tax

Expatriation is a significant life decision for anyone considering renouncing their U.S. citizenship or green card.  In almost all circumstances, the choice is irrevocable and entails relinquishing the benefits afforded to U.S. citizens and permanent residents.  Moreover, individuals considering expatriation should carefully evaluate the costs associated with the U.S. exit tax under Internal Revenue Code (IRC) Section 877A.  This provision imposes a U.S. exit tax on individuals who are determined to be “covered expatriates” and relinquish their U.S. citizenship or long-term permanent resident status.  The exit tax is designed to make sure that all unpaid taxes are resolved before a U.S. citizen or resident withdraws from the U.S. tax system.  Individuals subject to the U.S. exit tax generally are assessed tax as if they had sold all of their assets the day before the expatriation date, which is also known as a “deemed sale.”

Covered Expatriate

The U.S. exit tax only applies to an individual who is a “covered expatriate.”  A covered expatriate is an individual who meets any of the following tests:

1. Income Tax Liability Test: The average annual net income tax (as defined in IRC § 38(c)(1)) of such individual for the period of 5 taxable years ending before the date of expatriation is greater than $201,000 (2024) / $206,000 (2025);
2. Net Worth Test: The net worth of the individual is $2,000,000 or more on the date of expatriation or termination of permanent residency; or
3. Tax Compliance Test: Such individual fails to certify on Form 8854 under penalty of perjury that he or she has met theirS. federal tax filing requirements for the 5 preceding years or fails to submit such evidence of compliance as the Secretary may require.

However, certain exceptions apply, and an individual is not treated as meeting the income tax liability and net worth tests and will not be treated as a “covered expatriate” if either:

(i)   The individual became at birth a U.S. citizen and a citizen of another country and, as of the expatriation date, continues to be a citizen of, and taxed as a resident of, the other country, and has been a U.S. resident (as defined in IRC § 7701(b)(1)(A)(ii)) for not more than 10 taxable years during the 15 taxable years period ending with the taxable year during which the expatriation date occurs; or

(ii)  The individual’s relinquishment of U.S. citizenship occurs before the individual attains the age of 18½ and the individual has been a U.S. resident (as defined in IRC § 7701(b)(1)(A)(ii)) for not more than 10 taxable years before the date of such relinquishment.

In 1996, Congress expanded the rules so the exit tax applies to individuals who had never been U.S. citizens, but who were former “long-term residents” to include aliens who had a U.S. permanent residence status (Green Card) in at least 8 of the previous 15 years (“Long-Term Residents”).

In 2008, Congress substantially modified the anti-expatriation rules by replacing the special ten year calculation rule with a new “exit tax”, with respect to U.S. citizens and Long-Term Residents who renounced or otherwise lost their citizenship or Green Card status on or after June 17, 2008.  The exit tax in effect imposes an immediate U.S. income tax on the increase in value of certain assets that are owned by an expatriating individual.  If the individual becomes a non-resident alien (“NRA”) of the U.S., the individual will be subject to U.S. federal income tax on U.S. source income in the same manner as all other NRAs.

Calculating Exit Tax

IRC § 877A provides that all property of certain U.S. citizens who relinquish citizenship and certain Long-Term Residents who terminate U.S. residency will be treated as sold for its fair market value on the day before the expatriation date or residency termination date.  IRC § 877A(a) imposes on a covered expatriate a one-time mark-to-market tax on the net unrealized gain of all property (worldwide assets) of the expatriating individual, as if the property had been sold at its fair market value on the day before the expatriation date.  Mark-to-market is a measure of the fair market value of an individual’s assets and liabilities.  Gain from the deemed sale is taken into account without regard to other provisions of the IRC.  Any loss from the deemed sale generally is taken into account to the extent otherwise provided in the IRC, with some minor exceptions. 

The provision imposes a tax on any net gain on the deemed sale to the extent the gain exceeds $767,000 exemption (indexed for inflation annually).  Exemption amount for 2025 is $890,000 and the exemption amount for 2024 was $866,000.  Any gains or losses subsequently realized are to be adjusted for gains and losses taken into account under the deemed sale rules of the mark-to-market tax, without regard to the exemption amount.

The covered expatriate can elect to defer the tax on an asset-by-asset basis until the due date of the return for the taxable year in which such property is disposed of in a transaction in which gain is not recognized in whole or in part, until such other date as may be prescribed.  In order to make such election, the covered expatriate must provide adequate security, pay interest on such deferred tax, and agree to irrevocably waive any treaty rights that would preclude assessment or collection of the exit tax.

Deferred compensation items, specified tax-deferred accounts, and interest in non-grantor trusts, are excluded from the mark-to-market rules.  However, the expatriating individual must make certain irrevocable elections on Form 8854 (Expatriation Information Statement), including waiving treaty benefits with respect to reduction in withholding for certain eligible deferred compensation and waiving the right to claim a reduction in withholding on a distribution from a non-grantor trust, unless an election is made to include the value of the entire interest as of the day before the expatriation date.  A 30% withholding tax applies to eligible deferred compensation items and distributions from non-grantor trusts.  For ineligible deferred compensation items and specified tax deferred accounts, the provision treats the expatriates as receiving the present value of the items or distributions of their interests in the accounts on the day before the expatriation date.

For purposes of determining any tax imposed by reason of the exit tax, property that was held by the Long-Term Resident on the date the individual first became a resident is treated as having a basis on such date of not less than the fair market value of such property on such date (basis equals fair market value on residency start date), unless such individual irrevocably elects to have such treatment not apply.

Covered Gifts and Covered Bequests

There is a succession tax under IRC § 2801 (“IRC § 2801 Tax”) on U.S. citizens and residents and domestic trusts that directly or indirectly receive gifts or bequests from a covered expatriate (“covered gifts” or “covered bequests”).

The IRC § 2801 Tax is imposed on the net value of a covered gift or bequest (total value of a covered gift or bequest less annual exclusion amount) at the highest applicable federal gift and estate tax rate in effect at the time of receipt of the covered gift or covered bequest (currently 40%).  The IRC § 2801 Tax applies regardless of whether the property transferred was acquired by the covered expatriate before or after the expatriation date. There are certain exceptions for marital and charitable transfers of a covered expatriate, taxable gifts reported on a timely filed gift tax return, property included in a covered expatriate’s gross estate and reported on a timely filed estate tax return, and property transferred pursuant to a covered expatriate’s qualified disclaimer (as defined in IRC § 2518(b)).  Special rules apply to covered gifts or bequests made to foreign trusts.  In particular, assuming that the foreign trust does not elect to be treated as a domestic trust for purposes of IRC § 2801 (“non-electing foreign trust”), the IRC § 2801 Tax is imposed on distributions to U.S. beneficiaries that are attributable to the covered gift or bequest made to the trust.

The legislative history of IRC § 2801 and the preamble to the proposed regulations explain that the intent of IRC § 2801 is to subject gifts or bequests made by a covered expatriate to a U.S. person to a transfer tax equal to the U.S. estate or gift tax that would have been payable by the expatriate if he or she had not relinquished their U.S. citizenship or terminated their long-term residency.

There are a number of ways in which gifts and bequests of covered expatriates are subject to harsher tax treatment than gifts and bequests from U.S. citizens and residents.  For example, the gift tax is “tax exclusive,” meaning that the tax imposed does not reduce the amount received by the recipient (because it is paid by the donor), whereas the IRC § 2801 Tax is “tax inclusive,” because the tax is imposed on the recipient, thereby reducing the amount actually received by the recipient.  In addition, gifts and bequests by a U.S. citizen or resident benefit from the “unified credit”, which currently protects (as of 2025) $13,979,000 of taxable gifts or bequests from U.S. gift or estate tax.  However, the unified credit is not available to protect any portion of a covered expatriate’s gifts or bequests from the IRC §2801 Tax.

The final regulations for IRC § 2801 released on January 14, 2025 outline the method of reporting and paying the IRC §2801 Tax.  U.S. recipients must file Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates, which the IRS intends to issue for reporting and paying the tax.  U.S. recipients include a domestic trust that receives a covered gift or bequest and a non-electing foreign trust that has previously received a covered gift or bequest and subsequently becomes a domestic trust (migrated foreign trust). 

A foreign trust that receives a covered gift or bequest is not liable for IRC § 2801 Tax unless the foreign trust makes an election to be treated as a domestic trust solely for purposes of IRC § 2801.  Absent such an election, each U.S. recipient is liable for payment of the IRC § 2801 Tax on that person’s receipt of a distribution from the foreign trust to the extent that the distribution is attributable to a covered gift or bequest made to the foreign trust.  However, if a U.S. recipient receives a distribution from a non-electing foreign trust and pays an income tax on the distribution under IRC § 164 (generally regarding state and local taxes), the IRC § 2801 Tax can be offset by the income tax paid.

The regulations also address some ways that can reduce or eliminate the IRC §2801 Tax under certain conditions.  First, if the covered gift or bequest is subject to foreign estate or gift taxes under the tax laws of another country, and the recipient of the covered gift or bequest has already paid the foreign estate or gift taxes, the IRC §2801 Tax can be reduced by the amount of the gift or estate tax paid to the foreign country.  If the gift and estate tax is owed but not yet paid to the foreign country, a protective claim for refund may be filed to preserve the U.S. recipient’s right to claim a refund until after the expiration of the period of limitation for filing a claim for refund.

The regulations provide that IRC § 1015(d), which provides a basis adjustment to property received by gift to reflect gift tax paid, does not apply to adjust the basis of a covered gift to reflect gift tax paid under IRC § 2801.  Guidance to the regulations provide that IRC § 164 also does not apply to increase the basis of property received as a covered gift by the IRC §2801 Tax paid.  Essentially, the basis would be adjusted only if the donor had paid gift tax.

The regulations apply to covered gifts and bequests received on or after January 1, 2025.

Other Post-Expatriation Obligations

Net investment income tax: In addition to the exit tax, covered expatriates may be subject to the net investment income tax (NIIT) under IRC § 1411 on the deemed sale.  NIIT is an additional tax of 3.8% that applies to certain types of investment income such as interest, capital gains, and dividends, once an individual’s income exceeds certain threshold amounts.

Form 8854: Covered expatriates must file a Form 8854 with their timely filed final income tax return to certify their tax compliance for the five years prior to expatriation and prove loss of nationality.

1. S. source Income: Expatriates may still owe U.S. taxes on rental income, investments, and other U.S. source earnings through withholding or reporting obligations. Additionally, under IRC § 1445 (Foreign Investment in Real Property Tax Act (FIRPTA) tax), expatriates may be required to pay U.S. tax on the gain from the sale of U.S. real property interests.

Retirement account distributions: Distributions from retirement accounts, including those deemed distributed as part of the exit tax calculation, may be subject to additional taxes or penalties, depending on the type of account and the individual’s age at the time of distribution.

Ongoing reporting requirements: Depending on the individual’s specific circumstances, there may be ongoing reporting requirements for income or accounts, even after expatriation.

Planning and Advice

Certain aspects of the U.S. exit tax rules can result in expatriates having to pay a higher tax than they would have paid if they did not expatriate. Strategic planning and expert tax advice are crucial to reduce this risk and avoid penalties post-expatriation. Engaging in open communication with experienced cross-border tax advisers can help individuals renouncing U.S. citizenship or residency to effectively plan for the transfers of their assets and ensure a smoother transition from the U.S. tax system.