Exit Tax on Giving Up US Citizenship: Form 8854 and the Covered Expatriate Tests

The exit tax on giving up US citizenship applies only if Form 8854 shows you are a "covered expatriate": net worth of $2 million or more, average annual net income tax above $206,000 (2025) or $211,000 (2026), or no five-year compliance certification. Covered status triggers a deemed sale of worldwide assets, reduced by a $910,000 exclusion for 2026. Everyone else files Form 8854, certifies, and leaves with no exit tax at all.

Our earlier guide to the tax implications of renouncing US citizenship explains the decision in outline. This article is the technical companion: the exact tests, the current IRS figures, the exceptions, how the mark-to-market calculation works line by line, and the parts of Form 8854 that cause the most damage when they are rushed.

What is the exit tax on US citizenship and Form 8854?

The exit tax is the set of rules in Internal Revenue Code section 877A that apply when a "covered expatriate" leaves the US tax system. Form 8854, the Initial and Annual Expatriation Statement, is the form that determines whether you are covered and, if you are, calculates the tax.

Two groups are within the regime. The first is US citizens who relinquish citizenship. Under the IRS Instructions for Form 8854, a citizen's expatriation date is the earlier of the date you renounced before a US diplomatic or consular officer and the date the State Department issued a Certificate of Loss of Nationality. The second group is long-term residents: green card holders who were lawful permanent residents in at least 8 of the last 15 tax years. Years in which you were treated as resident of a treaty country without waiving treaty benefits are left out of that count. Our guide for green card holders living abroad covers the 8-of-15 count in more detail.

Filing Form 8854 is required whether or not any tax is due. The form is how the IRS learns that your US tax residence has ended, and it is the only place the five-year certification can be made.

The three covered expatriate tests

You are a covered expatriate if you meet any one of the following tests on your expatriation date. The figures below are taken from the IRS expatriation tax page, the 2025 Form 8854 instructions and Revenue Procedure 2025-32, which sets the 2026 inflation adjustments.

Test	2025 expatriation	2026 expatriation	What it measures
Net worth test	$2 million or more	$2 million or more	Worldwide net worth on the expatriation date, valued under the gift tax valuation principles of section 2512. Not indexed for inflation.
Tax liability test	More than $206,000	More than $211,000	Average annual net income tax for the 5 tax years ending before the expatriation date.
Certification test	Failure to certify	Failure to certify	Whether you certify on Form 8854, under penalty of perjury, that you complied with all US federal tax obligations for the 5 preceding tax years.

The net worth test catches people who are asset-rich but have modest US tax bills, such as a UK resident whose home and pension have grown in value. Net worth is worldwide and includes your share of jointly owned property, pension values, business interests and, in many cases, interests in trusts.

The tax liability test looks at net income tax actually shown on your US returns, after foreign tax credits. For many Americans in the UK, credits reduce US income tax to little or nothing, so this test is passed more often than people expect, even by high earners.

The certification test is the one that causes the most trouble. Someone with no net worth or income problem still becomes a covered expatriate if they cannot honestly certify five years of compliance, or simply do not complete that part of Form 8854. The certification wording in the instructions covers income tax, employment tax, gift tax and information returns, and paying all tax, interest and penalties due, not only filing Form 1040. If your filings have gaps, they need to be repaired before the expatriation date, usually through the Streamlined Foreign Offshore Procedures or, for qualifying accidental Americans, the IRS Relief Procedures for Certain Former Citizens.

Are there exceptions for dual citizens and minors?

Yes. Two exceptions remove the net worth and tax liability tests, but neither removes the certification test.

Dual citizen from birth

The dual-citizen exception applies if you became a US citizen and a citizen of another country at birth, you continue as of the expatriation date to be a citizen of, and taxed as a resident of, that other country, and you were a US resident for not more than 10 tax years in the 15-tax-year period ending with the year of expatriation. A person born in the US to British parents who returned to the UK as a child, and who is UK tax resident when they renounce, will often fit.

Relinquishment before age 18½

The minor exception applies if you relinquished citizenship before age 18½ and were a US resident for not more than 10 tax years before expatriating.

In both cases the Form 8854 instructions are clear that you are still treated as a covered expatriate unless you file Form 8854 and certify five years of compliance. An exception makes the wealth and income history irrelevant. It does not make the paperwork optional.

Decision flowchart: are you a covered expatriate?

Work through these steps in order. Stop at the first step that gives you an answer.

1. Are you a US citizen relinquishing citizenship, or a green card holder with permanent residence in at least 8 of the last 15 tax years? If neither, section 877A does not apply. A short-term green card holder still files a final-year return, but not as an expatriate under this regime.
2. Can you certify on Form 8854 that you met all US federal tax obligations for the 5 tax years before the expatriation year? If no, you are a covered expatriate regardless of wealth. Fix the filings before you expatriate.
3. Do you qualify for the dual-citizen-from-birth exception or the under-18½ exception? If yes, and you certify, you are not a covered expatriate. Stop here.
4. Is your worldwide net worth $2 million or more on the expatriation date? If yes, you are a covered expatriate.
5. Is your average annual net income tax for the 5 prior tax years more than $206,000 (2025 expatriation) or $211,000 (2026 expatriation)? If yes, you are a covered expatriate.
6. If you reached this step, you are not a covered expatriate. You file Form 8854 with your final-year return, and the mark-to-market rule, the deferred compensation rules and section 2801 do not apply to you.

How does the mark-to-market deemed sale work?

A covered expatriate is treated as having sold all property at fair market value on the day before the expatriation date. Any gain is included in income for the expatriation year, reduced by the exclusion amount, which is $890,000 for 2025 and $910,000 for taxable years beginning in 2026 under section 4.38 of Revenue Procedure 2025-32.

Three mechanical rules from the Form 8854 instructions shape the result:

• The exclusion is shared among gain assets only. It is allocated to each asset with a gain in proportion to that asset's share of total gain.
• Losses count. Losses from the deemed sale are taken into account to the extent the Code otherwise allows, and the wash sale rule of section 1091 does not apply.
• Gain keeps its character. Long-term holdings produce long-term capital gain. Basis and value are measured in US dollars, so a UK asset bought when sterling was stronger can show a larger dollar gain than its sterling gain.

Illustrative example: a US citizen living in Manchester renounces in 2026. Her net worth is about $2.55 million, so she is a covered expatriate under the net worth test. On the day before her expatriation date she holds (1) an investment portfolio worth $1,200,000 with a basis of $500,000, a gain of $700,000; (2) a rental flat worth $900,000 with a basis of $600,000, a gain of $300,000; (3) a fund worth $150,000 with a basis of $200,000, a loss of $50,000; and (4) a traditional IRA worth $300,000. Total gain on the gain assets is $1,000,000. The 2026 exclusion of $910,000 is allocated 70% to the portfolio ($637,000) and 30% to the flat ($273,000), leaving taxable gains of $63,000 and $27,000. After the $50,000 loss, the net deemed-sale gain is $40,000, taxed at her normal capital gains rates. Separately, the full $300,000 IRA balance is treated as distributed and taxed as ordinary income, with no exclusion and no early distribution penalty. Without the deemed IRA distribution, her mark-to-market bill would be modest; with it, the IRA is the larger tax item. This is illustrative only and ignores UK tax, foreign tax credits and currency details.

The example shows why the exclusion alone is not the whole story. People often focus on the $910,000 figure and overlook that retirement accounts sit outside it.

Deferred compensation, IRAs and non-grantor trusts

Three categories of asset are taken out of the mark-to-market calculation and taxed under their own rules.

Deferred compensation items

An eligible deferred compensation item is one where the payer is a US person (or elects to be treated as one), and the covered expatriate notifies the payer on Form W-8CE and irrevocably waives any treaty reduction in withholding. Payments are then subject to 30% withholding when made. An ineligible deferred compensation item is taxed up front: the present value of the accrued benefit is included in income for the expatriation year. The Form 8854 instructions treat a foreign pension plan or similar retirement arrangement as deferred compensation, which brings UK pensions into these rules rather than the deemed sale.

Specified tax-deferred accounts

Traditional IRAs (other than SEP and SIMPLE arrangements under sections 408(k) and 408(p)), 529 qualified tuition programs, ABLE accounts, Coverdell education savings accounts, HSAs and Archer MSAs are treated as if the entire balance were distributed on the day before the expatriation date. The amount goes on the final-year return, and the early distribution penalties do not apply. If you hold an IRA while living in the UK, our article on IRA withdrawals for UK residents explains how the treaty treats normal distributions, which is a different question.

Non-grantor trusts

For a beneficiary's interest in a non-grantor trust, the trustee withholds 30% of the taxable portion of each later distribution to the covered expatriate. An alternative is available if you obtain an IRS letter ruling valuing your interest and elect to be taxed on it at expatriation. Trust structures need joint US and UK review; our US/UK estate and trust planning team handles both sides.

Can you defer the exit tax?

A covered expatriate can make an irrevocable election to defer the tax on any property subject to the deemed sale, asset by asset. The conditions are demanding: you enter into a tax deferral agreement with the IRS, provide adequate security such as a bond, waive treaty rights that would stop the US collecting the tax, and pay interest on the deferred amount. Deferred tax becomes due on the return for the year the asset is disposed of or, at the latest, on death. You must also file Form 8854 annually until the deferred tax is paid.

Deferral helps where the deemed gain is on an illiquid asset, such as a private company stake, and there is no cash to pay the tax. For most people, the cost of security and interest makes it a fallback rather than a plan.

The section 2801 tax on gifts and bequests

Covered status follows a covered expatriate for life. Under section 2801, a US citizen or resident who receives a gift or bequest from a covered expatriate pays tax on it. The tax falls on the US recipient, not on the person who expatriated.

Per the Instructions for Form 708, the tax is reported on Form 708 and computed at 40%, the highest estate or gift tax rate, on covered gifts and bequests received in the calendar year above the per-donee amount in section 2503(b). Revenue Procedure 2025-32 sets that amount at $19,000 for 2026. Form 708 is due on the 15th day of the 18th month after the end of the calendar year in which the gift was received, and the tax can be reduced by foreign gift or estate tax paid on the same transfer. For families with US children or grandchildren, this tax is often the strongest reason to plan out of covered status rather than accept it.

Filing Form 8854: deadline and penalty

The initial Form 8854 is attached to the income tax return for the year that includes the expatriation date. For most citizens that is a dual-status return: Form 1040 for the part of the year before expatriation and Form 1040-NR for the rest. If you have no return to file for that year, the instructions direct you to send Form 8854 separately by the date the return would have been due.

The IRS states that a $10,000 penalty may be imposed for failure to file Form 8854 when required. The instructions extend this to a form that leaves out required information or includes incorrect information, unless the failure is due to reasonable cause. The penalty is not the larger risk. A missing or incomplete Form 8854 means the certification has not been made, and the certification test then makes you a covered expatriate.

What people get wrong about the exit tax

• Treating the embassy appointment as the end of the process. The Certificate of Loss of Nationality ends citizenship. Only the final-year return and Form 8854 close the US tax position.
• Assuming the dual-citizen exception means no forms. It removes two tests, not the certification.
• Valuing net worth in sterling. The $2 million test is applied in dollars on the expatriation date, so exchange rate movements can push someone over it.
• Forgetting pensions. UK pensions and US IRAs count towards net worth and are taxed under the deferred compensation or deemed distribution rules, outside the exclusion.
• Planning after the fact. Gifts to reduce net worth, realizing losses and repairing past filings all have to happen before the expatriation date. Our high-net-worth clients typically start this work a year or more ahead.

How we help with Form 8854 and expatriation

US/UK Cross Border Tax — US CPAs and UK tax advisers working as one team; London, Manchester, New York, San Francisco. Our exit tax US citizenship Form 8854 service tests you against all three covered expatriate tests before any appointment is booked, repairs earlier filings where the certification would fail, prepares the dual-status return and Form 8854, and checks the UK effect of the same events. If you were born a US citizen and never lived there, our page for accidental Americans sets out the gentler routes that may be open to you. To discuss your position, contact us for a fee quote.