What Is Expatriation Tax?
Expatriation Tax is a United States tax regime under which citizens and long-term residents giving up status may face a deemed sale of worldwide assets.
Also known as: US Exit Tax, Section 877A Expatriation Tax.
How Expatriation Tax works
Expatriation Tax applies when a United States citizen renounces citizenship or a long-term resident, meaning a lawful permanent resident in at least eight of the last fifteen tax years, ends that status, and the decisive question is whether the person qualifies as a covered expatriate under sections 877 and 877A of the Internal Revenue Code. According to the IRS, covered status follows from any one of three tests: average annual net income tax liability above an inflation-adjusted amount, set at 206,000 dollars for 2025; net worth of 2 million dollars or more on the expatriation date; or failure to certify five years of federal tax compliance on Form 8854. For a covered expatriate, all property is generally treated as sold at fair market value on the day before expatriation, and the resulting gain is reduced by an exclusion amount of 890,000 dollars for 2025, with an election available to defer payment. Deferred compensation, tax-deferred accounts and interests in non-grantor trusts follow separate rules, and later gifts or bequests from a covered expatriate to United States persons can attract a further transfer charge. Exceptions for certain dual citizens at birth and for minors who expatriate before age eighteen and a half apply only within residence limits, and figures are adjusted annually, so the year of expatriation decides the thresholds.
Expatriation Tax vs Exit Tax
Unlike a generic exit tax, which many countries trigger when a resident moves tax residence abroad, Expatriation Tax in the United States is triggered by giving up citizenship or long-term green card status. Moving abroad without renouncing leaves a United States citizen fully within citizenship-based taxation.
| Expatriation Tax | Exit Tax | |
|---|---|---|
| Trigger | Renouncing US citizenship or ending long-term lawful permanent residence | Ceasing tax residence in the taxing country, depending on national rules |
| Who is targeted | Covered expatriates meeting an income, net worth or certification test | Departing residents holding defined assets, often shares above national thresholds |
| Mechanism | Deemed sale of all property the day before expatriation, less an exclusion amount | Deemed disposal of specified assets on departure, often with deferral within the EU |
Example
Illustrative example: A United States citizen has lived in Country A for several years and decides to renounce citizenship in 2025. Net worth on the expatriation date exceeds the 2 million dollar test cited by the IRS (illustrative), so the person is a covered expatriate even though average income tax liability is modest. The person's investment portfolio is treated as sold at fair market value on the day before expatriation; the unrealised gain above the 890,000 dollar exclusion for 2025 (illustrative) becomes taxable on the final United States return, and Form 8854 is filed with the certification of five years of compliance. Had the same person stayed below every threshold and certified compliance, covered status would not have arisen and no deemed sale would apply, although Country A may still tax the later actual sale of the same portfolio under its own rules. The case shows that the tests look at wealth and compliance history, not only at income.
Common misconception
Myth: Renouncing US citizenship only becomes a tax event for very high earners.
Reality: Expatriation Tax can apply through the net worth test or a failed Form 8854 compliance certification, so moderate earners with appreciated assets or unfiled returns may still be covered expatriates.
Frequently asked questions
What is the US expatriation tax?
Expatriation Tax is the United States regime under IRC sections 877 and 877A which treats a covered expatriate's property as sold the day before renouncing citizenship or ending long-term residence, taxing gain above an annual exclusion.
Who is a covered expatriate?
A covered expatriate, for Expatriation Tax purposes, is a former citizen or long-term resident who exceeds the IRS net income tax threshold, holds net worth of 2 million dollars or more, or fails the Form 8854 compliance certification.
Do I pay tax when I renounce US citizenship?
Expatriation Tax generally arises on renunciation only for covered expatriates, although every person renouncing still files a final return and Form 8854, and certain dual citizens at birth or minors may fall within exceptions.
Is the expatriation tax the same as an exit tax?
Expatriation Tax is the United States version tied to citizenship or long-term residence, whereas exit taxes in many other countries are triggered by moving tax residence abroad, often only for specified assets.
Related terms
- Exit Tax — Residence-based departure tax often confused with US expatriation tax
- Covered Expatriate — Status deciding whether the expatriation tax applies
- Citizenship-Based Taxation — US system which ends only on expatriation
- Expatriation — Act of giving up US citizenship or long-term residence
- Accidental American — Dual citizens weighing renunciation and its tax effects
Related guides
- Global tax reform and US digital nomads — US tax context for Americans living abroad
- US expat tax reform debate — Debate on citizenship-based taxation and expatriation
Sources
Last verified: 2026-10-08. This entry is general information, not tax or legal advice; rules vary by country and change over time.
