Tax Law ✦ Exit Tax & International
Leaving America Has a Price Tag. Calculate It Before You Sign.
Renouncing citizenship or handing back a long-held green card can trigger the exit tax of I.R.C. § 877A: a deemed sale of everything you own on your way out the door. Planned early, most people can leave without owing it. Planned late, the appointment at the consulate becomes the most expensive signature of your life.
Overview
Who does the exit tax actually hit?
Only “covered expatriates,” and you become one by tripping any of three wires in I.R.C. §§ 877A and 877(a)(2): a net worth of $2 million or more on the expatriation date, an average annual net income tax liability over the five prior years above an inflation-indexed threshold (a bit over $200,000 in recent years), or failure to certify on Form 8854 that you were tax compliant for those five years. The third wire catches more people than the first two combined, because it turns ordinary sloppiness, an unfiled FBAR, a missed year abroad, into covered status regardless of wealth. Green card holders are in the system too: hold one in eight of the last fifteen years and surrendering it is an expatriation event with the same tests. New Mexico’s international community, LANL and Sandia scientists, university faculty, retirees splitting time in Mexico, runs into this constantly, usually by accident.
- Covered-expatriate testing before any irreversible step
- Five-year compliance cleanup: streamlined procedures, late FBARs
- Net worth planning: timing, gifting, and valuation before the date
- Form 8854 preparation and the deemed-sale computation
- Deferred compensation, IRAs, and trusts under the special regimes
- Section 2801 exposure for U.S. family receiving future gifts
The Law
What does the exit tax actually tax?
A pretend sale. Covered expatriates are treated as having sold every asset at fair market value the day before expatriation, with gain above an indexed exclusion, in the high $800,000s and climbing with inflation, taxed as if the sale were real. But the mark-to-market rule is only the headline; the side regimes bite harder.
| Asset | Treatment at exit | Planning lever |
|---|---|---|
| Appreciated stock, real estate, business interests | Deemed sold; gain above the exclusion taxed now | Basis, valuation, and timing planning; spread actual sales pre-exit |
| Traditional IRAs | Treated as fully distributed, taxed as ordinary income, no penalty | Multi-year drawdowns or Roth conversions before expatriating |
| Deferred compensation, pensions | Eligible plans: 30% withholding on future payments; ineligible: present value taxed now | Classification and elections on Form W-8CE within 30 days |
| Interests in nongrantor trusts | 30% withholding on future distributions | Trust restructuring long before the date |
| Future gifts/bequests to U.S. persons | Recipient pays tax at top gift rates under § 2801 | Complete family transfers before covered status attaches |
How do you leave without being “covered”?
By managing the three tests while they can still be managed. Net worth planning is legitimate and effective when started early: gifts to a citizen spouse are unlimited; gifts to others consume federal exemption but reduce the $2 million measurement; valuation discounts on closely held interests are real; and the measurement is on the expatriation date, so sequencing matters. The tax-liability test rewards timing around unusually high-income years. And the compliance certification is entirely within your control: the streamlined filing compliance procedures and delinquent information return paths can cure years of missed FBARs and foreign reporting before Form 8854 asks the question under penalties of perjury. The order of operations is absolute: fix compliance first, plan the balance sheet second, book the consulate appointment last. People who do it backwards convert a solvable problem into a permanent one.
What about green card holders who “just let it expire”?
A trap with a decade of teeth. For tax purposes, long-term resident status ends only through formal abandonment (Form I-407) or a treaty tie-breaker election, not by letting the card gather dust abroad. A scientist who spent nine years at Los Alamos, moved home, and never formally abandoned the card remains a U.S. tax resident with worldwide filing obligations, FBARs included, and when they finally do abandon it, the eight-of-fifteen-year clock has usually made them a long-term resident subject to the full exit tax analysis. The treaty election that stops the clock has its own costs and must be filed correctly. Anyone within two or three years of the eighth year should get the analysis done now, while options remain open.
Where does the rest of international tax fit?
Expatriation is the dramatic end of a spectrum that mostly involves staying put and filing correctly: FBARs and FinCEN 114 for foreign accounts, Form 8938, foreign pensions and PFIC problems for immigrants who kept investments at home, the foreign earned income exclusion for New Mexicans working abroad, and cross-border families with inheritances arriving from outside the country (Form 3520, and no, the inheritance itself is usually not taxable, but the unfiled form carries five-figure penalties). Our tax defense practice handles the cleanup side daily, including the FBAR penalty landscape we covered in our FBAR relief analysis. The connective theme: international tax punishes silence far more than income, so the filings are the strategy.
The Attorney-CPA Difference
An exit is a balance sheet event. Bring someone who audits balance sheets.
- Covered-status modeling with real valuations, not guesses
- Streamlined and delinquent-filing cleanups executed under privilege
- Form 8854, W-8CE, and the deemed-sale computation done in-house
- Family-side § 2801 planning so the tax doesn’t boomerang onto your kids
Questions & Answers
Exit tax questions, answered
I’m under the $2 million net worth line. Am I safe?
Only if you also pass the tax-liability test and can certify five years of full compliance on Form 8854. The certification test is the silent killer: one unfiled FBAR year makes you a covered expatriate at any net worth. Compliance review comes first, always.
Does renouncing citizenship end my U.S. filing obligations immediately?
Prospectively, mostly, after a final dual-status return and Form 8854. U.S.-source income, U.S. real estate, and withholding regimes can follow you, and covered expatriates leave § 2801 exposure behind for their U.S. family. Renunciation ends citizenship; it does not erase history.
My spouse is staying American. How does that change the plan?
Usefully. Unlimited marital gifts can move net worth below the threshold before the measurement date, and the staying spouse preserves the family’s U.S. footing. But gifts to that spouse re-enter the U.S. transfer tax system at their death, so it is rebalancing, not disappearance, and it needs to be documented well before the exit date.
Are my retirement accounts really taxed all at once?
Traditional IRAs are deemed fully distributed for covered expatriates, ordinary income in one year, though without the early withdrawal penalty. Employer plans classified as eligible deferred compensation instead face 30 percent withholding as paid. The classification and the W-8CE filing window drive real dollars, and pre-exit drawdown planning can beat both regimes.
I found old unfiled FBARs while preparing to expatriate. Now what?
Stop the expatriation clock and fix the filings first, typically through the streamlined procedures while they remain available. Certifying compliance falsely on Form 8854 is perjury; expatriating as a covered person for want of paperwork is expensive. The cure is almost always cheaper than either.
The consulate appointment is the last step. Make it the last step.
Confidential exit analysis: covered-status testing, compliance review, and the deemed-sale math on your actual balance sheet, before anything becomes irreversible.