US Exit Tax: when leaving triggers a deemed sale

Anyone who gives up US citizenship usually wants a clean break: no more returns to Washington, no FBAR, no bank questionnaires. Legally, renunciation is an act before a US consular officer. For tax purposes, it is a separate process with its own tests, and depending on how those tests turn out, leaving is either a formality or an event in which all your assets are treated as sold. This article explains the rules of Section 877A, which apply to everyone who gave up citizenship on or after June 17, 2008, or who ends their green card as a long-term holder: who is affected, how the three tests work, what exceptions exist, what the exit tax calculates and why Form 8854 decides everything. The process at the consulate is covered in our guide to renouncing US citizenship.

1Who is affected: US citizens and long-term green card holders

The rules apply to two groups. The first is US citizens who give up their citizenship. According to the IRS, the date of expatriation is the earliest of four possible dates: the day you renounce your citizenship before a US diplomatic or consular officer, provided the State Department later issues the Certificate of Loss of Nationality; the day you give the State Department a signed statement of voluntary relinquishment through one of the acts listed in the statute, again subject to later confirmation; the day the State Department issues the Certificate; or the day a US court cancels a naturalization.

The second group is long-term green card holders. Under the instructions to Form 8854, you count as long-term if you held a green card in at least eight of the last fifteen tax years, up to and including the year you leave. A year does not count if, in that year, you were treated as a resident of the other country under a tax treaty and did not waive the treaty benefits. Your status ends, for example, when you voluntarily surrender your green card on Form I-407 to a US consular or immigration officer, when a final administrative decision finds that you have abandoned it, or when, as a dual resident, you choose to be treated as a foreign resident under a treaty and notify the IRS. What this means in detail for green card holders is covered in a separate article.

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2The path to the Certificate of Loss of Nationality

If you want to renounce your citizenship abroad, the IRS guidance says you must appear in person before a diplomatic or consular officer at a US embassy or consulate and take the prescribed oath. The process is run by the State Department. Effective April 13, 2026, the State Department cut the fee for processing the Certificate of Loss of Nationality application from $2,350 to $450. What this change means, and what it does not mean, is explained in our article on the fee.

The IRS states explicitly that neither a complete tax history nor a Social Security Number is required to renounce citizenship under immigration law. So you can give up your citizenship without your taxes being in order. For tax purposes, though, you then remain a covered expatriate, with all the consequences this article describes. That is why the order decides the outcome: taxes first, then the consulate.

3Covered expatriate: the three tests

The exit tax does not hit everyone who leaves, only covered expatriates. You are a covered expatriate if any one of three tests applies.

3.1The tax liability test

Your average annual US income tax for the five tax years before you leave exceeds a threshold that is adjusted for inflation every year: $206,000 for 2025 and $211,000 for 2026.

3.2The net worth test

Your net worth on the date you leave is $2 million or more. This threshold is not indexed to inflation. It counts your worldwide assets, valued under the gift tax rules, so that includes your home in Europe, your investment portfolio, shares in your own company and retirement entitlements. If your net worth was ever $2 million or more in the five years before you leave but below that on the date you leave, Form 8854 asks you to explain how that changed. The instructions give the gift of a property to a child as an example.

3.3The certification test

On Form 8854 you certify, under penalty of perjury, that you have met all your US tax obligations for the five tax years before you leave. If you cannot, you are a covered expatriate, no matter how low your income and net worth are. According to the IRS, the certification requires that all federal tax returns for those five years were filed properly, completely and correctly. That includes information returns such as Form 8938.

4The exceptions for dual citizens from birth and minors

Section 877A has two exceptions that matter a great deal to Accidental Americans in Europe. The first applies to dual citizens from birth: if you became both a US citizen and a citizen of another country at birth, are still a citizen of that country on the date you leave and are taxed there as a resident, and were a US resident for no more than ten of the fifteen tax years up to the year you leave, you do not become a covered expatriate because of the tax liability or net worth test. US residency here is determined under the Substantial Presence Test.

The second exception applies to minors: if you give up citizenship before turning 18½ and were a US resident for no more than ten tax years, you are also exempt from the first two tests.

Both exceptions have a limit that is often overlooked. They apply only to the tax liability and net worth tests. Dual citizens and minors must still pass the certification test. So someone born in Boston, raised in Bavaria and who never filed a US return is a covered expatriate when giving up citizenship, unless they put the five prior years in order.

5What the exit tax calculates

Covered expatriates fall under a mark-to-market regime: all your assets are treated as sold at market value on the day before you leave. The gain from this deemed sale is taxed in the year you leave, even though you sold nothing. Losses are taken into account to the extent the law otherwise allows; the wash sale rules do not apply. An exclusion amount, adjusted for inflation every year, is deducted from the gain: $890,000 for 2025 and $910,000 for 2026. You can elect to defer the tax on individual assets until you actually sell them; for that, the law requires adequate security.

Some assets follow their own rules instead of the deemed sale. For deferred compensation, the law distinguishes between eligible items, where the payer withholds 30 percent going forward and you irrevocably waive treaty benefits, and ineligible items, whose present value is treated as received on the day before. Certain tax-favored accounts are treated as fully distributed on the day before: these include an IRA, a 529 plan for education costs, a Coverdell education savings account, an ABLE account, a Health Savings Account and an Archer Medical Savings Account. For interests in a non-grantor trust, the trust withholds 30 percent on taxable distributions.

In practice, this means that if you live in Europe and own a home that has gained value, a portfolio that has done well or your own company, you should have the numbers run before you leave. The deemed gain arises only in the US. Whether and how your country of residence credits such a US tax is a separate question.

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6Form 8854 and the final year

Form 8854 is the form you use to notify the IRS that you are leaving, to certify the five years and, if needed, to calculate the exit tax. You attach the initial filing, with Parts I and II, to your income tax return for the year you leave, so to Form 1040 or Form 1040-NR. If you do not have to file a return for that year, you send Form 8854 to the IRS by the date the return, including extensions, would have been due. If you reported eligible deferred compensation or interests in such a trust, you file Form 8854 every year after that.

If you fail to file Form 8854, or file it incomplete, you risk a penalty of $10,000 for each year, unless you have reasonable cause and the failure is not due to willful neglect. The IRS says it sends letters to expatriates who have not filed Form 8854. And without Form 8854, you lack the certification that protects you from the third test.

The year you leave is a split year: a US citizen up to the date of expatriation, not afterwards. How the return for such a year is structured belongs in the same planning as the consulate appointment. The deadlines for your final return are in our deadline calendar.

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7If the five years are missing: Streamlined or Relief Procedures

If you are still a US citizen and have not filed for the past few years, put them in order before you leave. For non-willful failures, the Streamlined Foreign Offshore Procedures are the designated route: three years of tax returns, six years of FBARs and the certification on Form 14653. Because the certification test covers five years, three Streamlined years alone are not always enough; which additional years you need depends on the year you expatriate.

For people who have already given up their citizenship after March 18, 2010, or plan to, the IRS introduced the Relief Procedures for Certain Former Citizens in September 2019. They are only available if every condition is met: no prior tax filing history as a US citizen or resident, the tax liability threshold not exceeded, a net worth below $2 million at expatriation and at filing, a total of no more than $25,000 in US tax for the expatriation year and the five years before it, and a non-willful failure. You file all returns for the six years concerned. If you qualify, you do not become a covered expatriate and owe no unpaid taxes or penalties for those and earlier years.

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8After you leave: gifts to children in the USA

One consequence of the exit tax hits not you but your family. When a US citizen or US resident receives a gift or inheritance from a covered expatriate, the recipient owes tax under Section 2801 at the top US estate tax rate, which by law is 40 percent. Only the amount of the annual gift tax exclusion stays tax-free: $19,000 for 2026. Any gift or inheritance tax paid abroad on the same transfer reduces the tax.

For families whose children remain US citizens or live in the USA, that is one more reason to check your status before you leave. If you are not a covered expatriate, this tax is never triggered. How gifts and inheritances across the Atlantic are otherwise treated is covered in our article on gifts and inheritance.

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9The order that works

1. Establish whether you are a US citizen or count as a long-term green card holder.
2. Review the five tax years before your planned exit: have all returns and information returns been filed, complete and correct?
3. Fix any missing years, through the Streamlined Foreign Offshore Procedures or, after expatriating, possibly through the Relief Procedures.
4. Run the numbers on the tax and net worth tests, and check whether the exception for dual citizens from birth applies.
5. If you are likely to be a covered expatriate, have the deemed sale calculated before you book an appointment.
6. Renounce your citizenship at the consulate or end your green card status.
7. File the return for your expatriation year with Form 8854 on time, and give your bank the Certificate of Loss of Nationality.

For how all the obligations that end with your exit fit together, see our overview of US tax obligations for Americans abroad. What your bank will want to see from you after you leave is explained in our article on FATCA in Europe.

In short

• The exit tax under Section 877A applies to covered expatriates: US citizens who give up their citizenship and long-term green card holders who end their status.
• You are a covered expatriate if your average US income tax exceeded $211,000 (2026), your net worth is at least $2 million, or you cannot certify compliance for the last five years on Form 8854.
• In that case all your assets are treated as sold the day before; gains above $910,000 (2026) are taxed, and separate rules apply to retirement savings and deferred compensation.
• Dual citizens from birth and minors under 18½ can escape the first two tests, but not the certification.
• Form 8854 belongs with the return for your expatriation year; skip it and you risk a $10,000 penalty and remain a covered expatriate.

How we help you

• US taxes for US citizens abroadForm 1040, FBAR and Streamlined for US citizens living in Europe.
• Streamlined FilingCatch up on missed US tax returns and FBARs through the Streamlined procedure.
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