Leaving the U.S. Tax System
Giving up U.S. citizenship, or giving up a green card held long enough, can trigger a charge computed as if every asset owned were sold on the day before the move. IRC §877A is the provision that does this, and it does not apply to everyone who expatriates. It applies to a defined subset called covered expatriates, identified by three separate tests, and the mechanics reach categories of people, particularly long-term green card holders, who often do not expect to be inside its scope at all.
Who this regime can reach
IRC §877A applies to an expatriate, a term that covers two distinct groups: a U.S. citizen who relinquishes citizenship, and a long-term resident whose status as a lawful permanent resident is treated as terminated for tax purposes. The citizen half of that definition is intuitive. The long-term resident half is where green card holders are most often caught off guard, for two separate reasons.
First, "long-term resident" has a specific statutory meaning under IRC §877(e): an individual who was a lawful permanent resident in at least 8 of the 15 taxable years ending with the year residency terminates. A green card held for a short period falls outside this definition entirely, and someone in that position can abandon the green card without triggering any §877A analysis, regardless of net worth. Someone who has held a green card across 8 or more of the preceding 15 years is inside the definition, and it is worth noting that a person only needs to have held the card for part of a year for that year to count toward the 8, which pulls the threshold closer than a simple count of full years would suggest.
Second, residency termination for a long-term resident is not limited to formally surrendering the green card or having it administratively revoked. Under IRC §7701(b)(6), a long-term resident is also treated as terminating residency if the individual begins to be treated as a resident of a foreign country under an applicable income tax treaty's tie-breaker provision, does not waive the benefits of that treaty applicable to residents of the other country, and notifies the IRS of that position, typically through the treaty-based return position disclosure on Form 8833 filed with a Form 1040-NR. A green card holder who claims treaty residence in another country this way can find that the IRS treats U.S. tax residency as terminated, and the exit tax analysis engaged, even though the individual still physically holds the green card and has taken no immigration action at all. This is one of the more counterintuitive mechanics in the exit tax regime, and it is precisely the kind of position that should not be taken without understanding that it can start the §877A clock.
The three tests for covered expatriate status
Not every citizen who relinquishes citizenship, and not every long-term resident whose status terminates, is a covered expatriate. IRC §877A(g)(1), by reference to IRC §877(a)(2), applies the mark-to-market regime only to an expatriate who meets at least one of three tests as of the expatriation date.
| Test | What it measures |
|---|---|
| Net worth test | Average net worth of $2,000,000 or more on the expatriation date. This figure is fixed in the statute and is not adjusted for inflation. |
| Average net income tax liability test | Average annual net income tax liability for the 5 taxable years ending before the expatriation date exceeds a threshold amount that is adjusted annually for inflation. Consult the current Rev. Proc. for the figure applicable to the year of expatriation rather than relying on a prior year's number. |
| Certification test | Failure to certify, under penalty of perjury on Form 8854, compliance with all federal tax obligations for the 5 taxable years preceding the expatriation date, or failure to submit the required evidence of that compliance. |
Meeting any one of the three is enough to be a covered expatriate. The certification test is the one most within a taxpayer's control to avoid, since it turns entirely on filing history and on completing Form 8854 accurately, rather than on a balance sheet or income figure that may be harder to influence close to the expatriation date.
The statute carves out two narrow exceptions even where a test is otherwise met. An individual who became at birth a citizen of both the United States and another country, continues to be taxed as a resident of that other country, and was not present in the United States for more than 30 days in any of the 10 years preceding expatriation, can fall outside covered expatriate status under the dual-citizen exception. A second exception applies to certain individuals who relinquish citizenship before age 18 and a half, having been a U.S. resident for no more than 10 taxable years before the expatriation date. Both exceptions have specific conditions attached and should be verified against the exact facts rather than assumed to apply.
The mark-to-market charge
For a covered expatriate, IRC §877A(a) treats all property as sold for its fair market value on the day before the expatriation date. Gain is recognized to the extent it exceeds an exclusion amount that is adjusted annually for inflation; the applicable figure for a given expatriation year should be confirmed against the current Rev. Proc. rather than an older published number. Recognized gain above that exclusion is included in income for the year that includes the day before expatriation, taxed under the normal rules that would apply to a real sale of that character of property, generally at capital gains rates for capital assets.
Losses are also recognized under the deemed sale, and are taken into account to the extent otherwise allowed under the Code, subject to the ordinary loss limitation rules that would apply to any other disposition, without the exclusion amount offsetting losses the way it offsets gains. The deemed sale does not require that any asset actually be sold or that any cash change hands. The tax is computed and, absent a valid deferral election, becomes due based on unrealized appreciation the individual continues to hold.
Categories that skip the deemed sale and get their own rules
Not every asset a covered expatriate owns is swept into the mark-to-market computation. IRC §877A(d) through (f) carve out three categories that are instead handled under separate mechanisms.
Eligible deferred compensation items are generally not marked to market. Instead, the payor is required to withhold at a flat 30 percent rate when amounts are actually paid to the covered expatriate, provided the expatriate has waived any treaty-reduced withholding rate for that item. Ineligible deferred compensation items, a category defined by more restrictive conditions, are instead treated as if the covered expatriate received the entire present value of the accrued benefit on the day before expatriation, which is taxed immediately rather than deferred.
Interests in specified tax-deferred accounts, a category that includes vehicles such as individual retirement accounts, are treated as fully distributed to the covered expatriate on the day before expatriation, with the distribution taxed under the rules that would ordinarily apply to a real distribution from that type of account, but generally without the early-distribution penalty that would otherwise apply.
Interests in nongrantor trusts are handled differently again: rather than a deemed distribution on expatriation, the trustee is required to withhold 30 percent on the taxable portion of any actual distribution made to the covered expatriate after expatriation, treating the covered expatriate as a nonresident alien for this purpose regardless of any treaty relief that might otherwise apply.
Form 8854 and why expatriation is not final for tax purposes on the day it happens
IRC §7701(n) provides that an individual continues to be treated as a U.S. citizen or long-term resident for federal tax purposes until two conditions are both satisfied: the individual has given the required notice of the expatriating act, to the State Department in the case of a citizen or to the Department of Homeland Security in the case of a long-term resident, and the individual has filed Form 8854, Initial and Annual Expatriation Statement. Losing citizenship or green card status for immigration purposes on a given date does not, by itself, end U.S. tax residency on that same date if Form 8854 has not been filed. This gap matters because it means an individual can be years removed from the immigration-law expatriation event and still be treated as a U.S. taxpayer for federal purposes, filing full resident or citizen returns, until Form 8854 is filed and the tax-law expatriation date is fixed.
Form 8854 is also where the three covered expatriate tests are computed and certified, and, for covered expatriates with deferred compensation items, specified tax-deferred accounts, or nongrantor trust interests still working through the specialized rules above, it is filed annually until those items are fully accounted for, not only in the year of expatriation.
The deferral election
IRC §877A(b) permits a covered expatriate to elect, on an asset-by-asset basis, to defer payment of the mark-to-market tax attributable to a specific asset until the asset is actually disposed of or, if earlier, until death. The election requires providing adequate security to the IRS, commonly a bond, and interest accrues on the deferred amount from the original due date. The election is irrevocable once made for a given asset, and specified triggering events can accelerate the deferred tax before an actual disposition occurs. This is a mechanism for managing liquidity against an illiquid asset, not a way to avoid the tax altogether.
A downstream consequence for people who are not the expatriate
The exit tax regime does not end with the expatriate's own return. IRC §2801 imposes a separate tax on certain U.S. persons who receive a gift or bequest from a covered expatriate, generally at the highest gift or estate tax rate then in effect, payable by the U.S. recipient rather than by the expatriate. The tax applies to covered gifts and bequests received after the individual became a covered expatriate, with exceptions for transfers already subject to U.S. gift or estate tax and for transfers to a U.S. citizen spouse or to charity, among others. This provision means that a family member or friend who is a U.S. person, and who later receives a gift or inheritance from someone who expatriated as a covered expatriate, can have a tax obligation of their own tied directly back to that person's expatriation, years after the expatriation itself occurred. It is a reason the analysis before expatriating should account for the people likely to receive transfers afterward, not only the expatriate's own exposure.
A worked illustration of the 8-of-15-year threshold
Consider two green card holders with otherwise identical net worth, each above the $2,000,000 threshold. The first obtained the green card 4 years ago and wants to abandon it now. Because 4 years falls short of 8 of the preceding 15 taxable years, this individual is not a long-term resident under IRC §877(e) at all, and abandoning the green card does not engage IRC §877A regardless of net worth. The second obtained the green card 9 years ago and has held it continuously since. This individual meets the long-term resident definition, and abandoning the green card, or triggering termination through the treaty tie-breaker route described above, puts the net worth test squarely in play. The single variable separating a nonevent from a mark-to-market computation is how long the card has been held relative to the 15-year look-back window, which is why the calendar history of the green card, not just its current status, is the first thing to establish before any expatriation planning begins.
Why this is not a decision to make alone
Expatriation is, for tax purposes, generally irreversible once the conditions under IRC §7701(n) are met, and it interacts directly with immigration law in ways a tax analysis alone does not capture, particularly for long-term residents whose status can be treated as terminated through a treaty position taken on a tax return rather than through any formal immigration filing. The net worth and income thresholds, the availability of the dual-citizen or minor exceptions, and the treatment of deferred compensation, retirement accounts, and trust interests all depend on facts specific to the individual and have to be modeled before the expatriating act, not after it. Anyone considering this step should coordinate the tax analysis with qualified immigration counsel before taking any action that could be treated as an expatriating act, since the tax and immigration consequences move on related but not identical timelines.
This is general information about how the expatriation and exit tax rules operate as of the date written. It is not advice on any individual's expatriation decision, and this is an area where the analysis has to be built around the specific person's facts, in coordination with both tax and immigration counsel, before any irreversible step is taken.