Expatriation & Exit Tax

For a covered expatriate, Section 877A pretends you sold everything you own worldwide, at fair market value, on the day before expatriation. Houses, portfolios, business interests, crypto: the paper gain is computed as if realized, then reduced by an inflation-adjusted exclusion before tax applies. Pensions and deferred compensation follow their own harsher rules, with some plans taxed as an immediate lump sum and others subjected to withholding on future payments.

Because the tax is on unrealized gains, cash to pay it does not arrive with the bill. Planning focuses on the inputs: establishing defensible valuations, harvesting basis where possible, and timing the expatriation date against markets and exchange rates. An election to defer the tax on specific assets exists, but it requires security and accrues interest, so it is a fallback rather than a strategy.

You are a covered expatriate if any one of three things is true: your worldwide net worth is $2M or more, your average US tax liability over the prior five years exceeds an inflation-adjusted threshold, or you cannot certify five years of full US tax compliance on Form 8854. Fail one test and the whole regime applies. Pass all three and you leave with no exit tax at all, which is why the years before expatriation matter more than the year of it.

Net worth can often be managed down below $2M through gifts made before expatriation, using the lifetime gift exemption while you still have it. Compliance failures are usually fixable through catch-up filings. Even for those who will be covered regardless, sequencing gifts, realizing losses, and choosing the expatriation date can take a large bite out of the deemed gain. All of it has to happen before the passport is handed over.

Covered expatriate status does not end at the border. Under Section 2801, US persons who later receive gifts or bequests from a covered expatriate pay a transfer tax on what they receive, at the top estate tax rate. If your children or spouse are US persons, expatriating as a covered expatriate quietly converts your future generosity into their tax bill. That alone justifies planning your way out of covered status where it can be done.

There are gentler paths for the right facts. The IRS Relief Procedures for Certain Former Citizens let qualifying accidental Americans, broadly those with modest net worth and small historical tax liabilities, renounce and settle their US tax affairs without penalties and without covered status. The renunciation itself runs through the State Department: an appointment at a US embassy or consulate, an oath, and a Certificate of Loss of Nationality that fixes the date everything above turns on.