What is Exit Tax?
A tax on unrealized gains imposed on covered expatriates who renounce US citizenship or long-term residency.
Definition
The exit tax (Section 877A) applies to covered expatriates who renounce US citizenship or terminate long-term resident (green card) status. It treats all worldwide assets as if sold at fair market value on the day before expatriation, triggering capital gains tax on the net unrealized gain exceeding the exclusion amount ($866,000 for 2023). Deferred compensation and specified tax-deferred accounts have special rules. The exit tax is designed to prevent wealthy individuals from expatriating to avoid US taxation.
Expert Tips
You are a 'covered expatriate' if your net worth exceeds $2 million, or your average net income tax for the 5 preceding years exceeds the inflation-adjusted threshold (~$201,000 for 2026).
The exit tax treats all your assets as sold at fair market value on the day before expatriation. The first ~$866,000 (2026, inflation-adjusted) of gain is excluded.
Retirement accounts (IRAs, 401ks) are taxed differently: the IRS treats them as fully distributed on the day before expatriation, taxed as ordinary income.
Planning ahead can dramatically reduce the exit tax. Consider gifting, charitable donations, or installment elections before filing Form 8854.
Canadian residents renouncing US citizenship face double complexity: both IRS exit tax and potential CRA departure tax may apply. Cross-border planning is essential.
Who Needs to Know This?
US citizens renouncing citizenship and long-term residents (green card holders for 8+ of the last 15 years) abandoning their status who meet the covered expatriate thresholds.
Key Deadline
Form 8854 due with the final dual-status or final US tax return
Potential Penalties
Failure to file Form 8854 results in continued US tax obligations and potential penalties
Related Forms
Common Mistakes to Avoid
- 1Not realizing long-term green card holders are subject to exit tax
- 2Failing to file Form 8854
- 3Not understanding the covered expatriate net worth and tax thresholds
- 4Missing the exclusion amount that reduces the exit tax
Related Terms
Helpful Resources
Expatriation Tax Planning
Our cross-border specialists help you navigate Form 8854 and minimize exit tax liability.
Streamlined Filing Procedures
If you're behind on filings, catch up before expatriating to avoid covered expatriate status.
Book a Free Consultation
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Harsh Agarwal, EA · IRS Enrolled Agent
Reviewed for accuracy by Zenith Financial Advisors
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