Exit Tax: What to Know Before Giving Up Your Green Card or US Citizenship
The US exit tax is the expatriation tax that can apply when a US citizen renounces citizenship or a long-term green card holder gives up residency status. It matters because the tax is not limited to cash in the bank. Under IRS Instructions for Form 8854, covered expatriates can be treated as if they sold most worldwide assets at fair market value on the day before expatriation. The same IRS guidance says a long-term resident is someone who held lawful permanent resident status in at least 8 of the last 15 tax years, and covered expatriate status can arise from wealth, tax liability, or a failure to certify five full years of federal tax compliance. That means the planning window is before renunciation or abandonment, not after.
In practice, the biggest mistake is treating expatriation as an immigration-only event. Once the expatriation date arrives, valuation positions, deferred compensation treatment, and compliance certification are largely locked in. Form 8854 guidance also confirms that Section 2801 can impose tax on US recipients of gifts or bequests from covered expatriates, so the consequences can continue long after the move itself. “Exit tax planning works best when immigration timing and tax timing are decided together,” says Kari Foss-Persson, Esq., Managing Partner at Vinland Immigration. “If you wait until the appointment is booked, most of the useful levers are already gone.”
Once expatriation is complete, the planning window closes quickly. The covered expatriate tests, the asset valuation date, and the compliance certification all need to be addressed before you give up citizenship or abandon your long-term green card.
Who is a covered expatriate?
You become a covered expatriate if one of the statutory tests applies on the expatriation date, even if you think you are below the headline wealth threshold.
Under IRS Instructions for Form 8854, covered expatriate status applies if your average annual net income tax liability for the five years before expatriation exceeds the indexed threshold, your net worth is at least $2 million, or you fail to certify five full years of federal tax compliance on Form 8854. The same instructions define a long-term resident as someone who was a lawful permanent resident in at least 8 of the last 15 tax years.
How does the mark-to-market regime work?
The core exit-tax rule treats most property as sold for fair market value on the day before expatriation and taxes the unrealized gain.
IRS Instructions for Form 8854 describe Section 877A as a deemed sale of most worldwide assets on the day before the expatriation date. That usually includes public securities, private business interests, real estate, and many foreign assets. The calculation is done asset by asset, and foreign-currency movements can change the US tax result even where the local-currency gain looks small.
Losses can offset gains to the extent generally allowed, but you do not get to postpone the analysis until after the expatriation date. That is why valuations, liquidity planning, and documentation should be done while you still have room to act.
What does the exclusion amount actually shelter?
The exclusion shelters a fixed amount of net unrealized gain from the deemed sale, but only once and only after the covered expatriate rules apply.
For 2025 expatriations, IRS Instructions for Form 8854 set the Section 877A exclusion at $890,000 of net gain. It is not a per-asset allowance and it does not remove covered expatriate status. It simply reduces the portion of total deemed gain that becomes taxable after all covered assets are netted together.
If your total gain is under the exclusion, the mark-to-market tax may be zero. That does not mean the case is simple, because deferred compensation, specified tax-deferred accounts, and future transfers to US persons can still create separate exposure.
Deferred compensation and tax-deferred accounts
Retirement plans, deferred compensation, and certain tax-favored accounts do not all follow the ordinary mark-to-market rule.
- Eligible deferred compensation
- If statutory notice and withholding conditions are met, future payments are generally subject to 30% withholding instead of an immediate deemed distribution.
- Ineligible deferred compensation
- Items such as certain stock compensation and nonqualified plans are generally treated as received on the day before expatriation.
- Specified tax-deferred accounts
- IRAs, HSAs, Coverdell accounts, and similar vehicles are generally treated as fully distributed immediately before expatriation.
These categories are technical, and the labels matter. “Clients often focus on the brokerage account and miss the retirement-side traps,” says Kari Foss-Persson, Esq., Managing Partner at Vinland Immigration.
Why does Section 2801 matter after expatriation?
Exit tax exposure can continue after expatriation because later gifts and inheritances to US persons may trigger a separate tax regime.
IRS Instructions for Form 8854 state that Section 2801 imposes tax on US citizens and residents who receive gifts or bequests from covered expatriates. In other words, a covered expatriate can leave a future transfer problem for children, heirs, or other US recipients even if the original mark-to-market bill was modest.
That issue is easy to miss because the tax falls on the US recipient, not on the expatriate at the time of the transfer. Family citizenship, expected inheritance paths, and trust planning all matter here.
Planning before expatriation
The strongest planning moves happen before the expatriation date, because that is when status, values, and reporting positions are still flexible.
- 1
Confirm whether you are an expatriate for tax purposes
Check whether you are renouncing citizenship or ending long-term residency, and confirm the precise expatriation date that the tax rules will use.
- 2
Model covered expatriate status before you act
Run the three tests in advance, including the certification test, rather than assuming net worth is the only issue.
- 3
Value assets and isolate special categories
Separate ordinary assets from deferred compensation, specified tax-deferred accounts, and any trust interests before the filing date arrives.
- 4
Fix compliance gaps first
If prior returns or information forms are missing, solve that before expatriation so Form 8854 certification is still available.
- 5
Coordinate the tax and immigration timeline
Renunciation appointments, I-407 timing, treaty-residency positions, and liquidity events should be planned together rather than one by one.
Our cross-border tax team advises clients on expatriation planning, covered expatriate analysis, and pre-expatriation compliance before the expatriation date is locked in.