Renouncing US citizenship does not end the tax bill — for many expatriates, it triggers the largest single tax event of their lives. The mechanism is Section 877A of the Internal Revenue Code, the mark-to-market exit tax that treats a covered expatriate as having sold every asset they own on the day before expatriation. This guide walks through how Section 877A actually works: who is a covered expatriate, how the deemed sale is calculated, the narrow exceptions for dual citizens at birth and certain minors, why long-term green-card holders are pulled into the same regime, and what Form 8854 requires. It is research, not tax advice. Renunciation is irrevocable — anyone considering it should work with a qualified US-expat-tax specialist and, for the immigration side, a nationality lawyer before acting.
Why renunciation is a tax question at all
The United States is one of only two countries in the world that taxes its citizens on worldwide income regardless of where they live (Eritrea is the other). A US citizen in Dubai, Singapore, or Monaco still files an annual Form 1040 on worldwide income, still reports foreign accounts on FBAR and Form 8938, and still faces GILTI on controlled foreign corporation earnings. The Foreign Earned Income Exclusion — $132,900 for 2026 — and the Foreign Tax Credit reduce the double-tax overlap, but they do not end the filing obligation. See our overview at /countries/united-states and the comparison in FEIE vs Foreign Tax Credit.
For a US person permanently settled abroad, particularly in a zero-tax jurisdiction, the ongoing compliance cost and residual US tax exposure — GILTI on operating companies, the Net Investment Income Tax at 3.8%, potential state residency claims, estate tax exposure on worldwide assets — can eventually justify the drastic step of renunciation. The trade-off is Section 877A: the US taxes the unrealised gain on the way out.
Section 877A: the mark-to-market exit tax
Enacted as part of the HEART Act in 2008 and effective from 17 June 2008, Section 877A imposes a mark-to-market deemed sale on the day before expatriation. Every asset the expatriate owns is treated as sold at fair market value, and the net unrealised gain above an exclusion amount is taxed at ordinary or capital-gains rates depending on the asset. The tax is due on the final Form 1040 for the year of expatriation.
Section 877A applies only to covered expatriates. Meeting any one of three tests makes an expatriate covered:
- Income test: average annual net US income tax over the five years ending before the expatriation year exceeds an inflation-indexed threshold. The threshold was USD 206,000 for 2025 expatriations; the 2026 figure is adjusted upward — verify the current IRS-published number before relying on it.
- Net worth test: worldwide net worth of USD 2 million or more on the expatriation date. This threshold is not indexed to inflation and has been USD 2M since the regime began — a critical detail, because asset appreciation has pulled far more people into covered status over time than Congress originally anticipated.
- Certification test: failure to certify on Form 8854, under penalty of perjury, that all US federal tax obligations for the five preceding tax years have been complied with. Non-filers and delinquent filers are automatically covered regardless of income or net worth.
Meeting any one of the three tests is sufficient. In practice, the certification test is the trap that catches expatriates who assumed they could renounce first and clean up filings later — they cannot.
How the deemed sale is calculated
For a covered expatriate, every interest in property that would be reportable on a US estate tax return is deemed sold on the day before expatriation. Gains are recognised; losses are also recognised (subject to the wash-sale rules being suspended for this calculation). The character of the gain — capital or ordinary — follows the character the asset would have had in a real sale, so long-term capital gains still qualify for the 0/15/20% preferential rates, and the 3.8% Net Investment Income Tax may apply above the standard MAGI thresholds.
The statute grants an exclusion amount — a slice of net gain that is not subject to tax. The exclusion was USD 890,000 for 2025 and is indexed annually; the 2026 amount will be marginally higher and should be checked against the IRS inflation adjustment release. The exclusion is allocated pro rata across assets with net gain. Losses on some assets can offset gains on others within the mark-to-market computation.
Certain assets are carved out of the deemed sale and handled under separate rules:
- Eligible deferred compensation (qualified US plans, most 401(k)s and IRAs held with US custodians willing to comply): no immediate tax, but the payer withholds 30% on future distributions, and the expatriate must waive treaty benefits that would reduce that rate. Ineligible deferred compensation is treated as receiving a lump-sum distribution on the day before expatriation.
- Specified tax-deferred accounts (traditional IRAs, health savings accounts, Coverdell ESAs, 529 plans, qualified tuition programs): deemed fully distributed on the day before expatriation, with ordinary-income tax on the entire deemed distribution but no 10% early-withdrawal penalty.
- Interests in non-grantor trusts: no mark-to-market. Instead, the trustee must withhold 30% from future distributions to the covered expatriate that would have been included in gross income if they were still a US person.
The exit-tax mechanic is broadly parallel to the deemed-disposal regimes used by countries like Canada, Australia, France, and Germany when residents emigrate. Our guide at Exit Taxes Explained compares those regimes side by side.
Deferral election
A covered expatriate can elect to defer payment of the exit tax attributable to each specific asset until that asset is actually sold. The election requires adequate security (typically a bond or letter of credit acceptable to the IRS), waiver of treaty benefits that would prevent US collection, and payment of interest on the deferred amount at the underpayment rate. The deferral is asset-by-asset, not a blanket postponement, and is procedurally involved — expatriates with illiquid assets like private company stock use it more often than those holding public equities.
Exceptions: dual citizens at birth and certain minors
Two narrow exceptions can let an otherwise-covered individual escape the income and net worth tests. Both still require passing the certification test: five years of tax compliance sworn on Form 8854. Failing that test alone makes anyone covered, regardless of the exceptions below.
Dual citizen at birth exception
An expatriate is exempt from the income and net worth tests if all of the following apply:
- They became at birth a citizen of the United States and a citizen of another country, and as of the expatriation date they continue to be a citizen of, and are taxed as a resident of, that other country.
- They have been a US resident (under the substantial presence test or as a green-card holder) for no more than 10 of the 15 taxable years ending with the expatriation year.
The exception is genuinely useful for accidental Americans — people born abroad to US-citizen parents, or born in the US to non-US parents and taken home as infants — who have lived their working lives outside the US and hold citizenship of a country that continues to tax them as residents. It does not help someone who acquired dual citizenship later in life, and it does not help someone who has spent most of their adult life inside the US.
Minor expatriation exception
An individual who expatriates before age 18½ is exempt from the income and net worth tests if they were a US resident for no more than 10 taxable years before expatriation. The window is narrow: renunciation shortly after an 18th birthday is possible; delay much past 18½ and the exception is lost.
Long-term green-card holders are covered too
A common misconception is that Section 877A only applies to citizens. It does not. The regime also captures long-term residents (LTRs) who abandon their green cards or are treated as ceasing to be lawful permanent residents.
An LTR is defined as an individual who was a lawful permanent resident (a green-card holder) in at least 8 of the last 15 taxable years ending with the year of expatriation. Any portion of a year counts as a full year for this purpose, so the practical trigger arrives faster than a naive reading suggests — someone who received a green card in late 2019 and gives it up in early 2026 has been an LTR for eight taxable years and is inside the regime.
Once inside, the LTR is subject to the same three covered-expatriate tests as a citizen renouncer, the same mark-to-market deemed sale, the same Form 8854 requirement, and the same certification test. Treaty tie-breakers add a subtle trap: an LTR who becomes a treaty resident of another country and claims treaty benefits to be treated as a non-US resident may be deemed to have expatriated under Section 7701(b)(6) as of that treaty-election date — triggering the exit tax even without formally surrendering the green card.
Form 8854 and the state layer
The compliance backbone of Section 877A is Form 8854, Initial and Annual Expatriation Statement. It is filed with the final Form 1040 for the year of expatriation. The form:
- Determines and certifies covered-expatriate status.
- Includes the balance-sheet listing of all assets and liabilities used to compute the mark-to-market gain.
- Contains the certification of five years of US federal tax compliance.
- Reports any deferral elections, deferred compensation waivers, and non-grantor trust interests subject to future withholding.
The final 1040 covers the portion of the year through the expatriation date. For anyone with a state-residency footprint, the state layer is separate and must be planned independently. Sticky states — California, New York, Virginia, New Mexico, South Carolina — continue asserting residency long after departure absent affirmative severance steps. Our guide at State Residency Severance for US Citizens covers the pre-move re-domicile play those states require.
Section 2801: the tax on future gifts and bequests
The exit tax is not the only cost. Section 2801, added by the same 2008 legislation, imposes a tax on US persons who receive gifts or bequests from a covered expatriate — indefinitely, without an expiration date. The tax rate equals the highest estate or gift tax rate in effect (currently 40%), applied to the value received above the annual gift exclusion.
Section 2801 is the reason covered-expatriate status has consequences that outlast the expatriate. A US-citizen child or grandchild who inherits from a covered-expatriate parent decades after renunciation still owes the 40% tax. Final regulations under Section 2801 were issued in early 2025 after a long delay, and the compliance mechanics — reporting on Form 708 — are now in force. Planning around Section 2801 typically involves the expatriate transferring assets before expatriation, restructuring inheritances through non-US-person recipients, or accepting the tax as a cost of the family footprint being partly US.
What the numbers actually look like
The exit-tax cost depends heavily on portfolio composition and character of gain. A stylised illustration for a covered expatriate with USD 5 million net worth, half of which is long-term unrealised gain in public equities, gives a rough sense of the ceiling:
| Component | Value (illustrative) |
|---|---|
| Net worth on expatriation date | USD 5,000,000 |
| Aggregate unrealised gain | USD 2,500,000 |
| Less exclusion amount (approx. 2026) | (USD 900,000) |
| Net taxable gain | USD 1,600,000 |
| Tax at 20% LTCG + 3.8% NIIT | ≈ USD 381,000 |
Real cases diverge from this in both directions. Concentrated founder stock at a low basis produces materially higher exit-tax bills. Portfolios dominated by cash, recently-purchased assets, or tax-deferred accounts (which follow the special rules above) produce lower ones. The USD 500 State Department renunciation fee is trivial relative to Section 877A; it is the tax bill, not the fee, that dominates the decision.
Where renunciation fits in the broader planning picture
Renunciation is not a general tax-planning technique — it is a terminal step. Before considering it, most US persons abroad exhaust the intermediate options: qualifying for the FEIE via the Physical Presence or Bona Fide Residence test, using the Foreign Tax Credit against high-tax jurisdictions, restructuring active business income to reduce GILTI exposure, or moving to Puerto Rico under Act 60 for domestic-territory tax benefits without giving up citizenship. Our overview at How US Citizens Can Pay 0% Tax Legally walks through those alternatives.
Renunciation makes economic sense in a narrow set of situations: a person with no plan to ever return to live or work in the US, whose ongoing US compliance cost and residual GILTI or NIIT exposure exceed the one-time exit-tax hit, and who has a viable second citizenship they can rely on for travel, banking, and residency. The US Citizen's Complete Guide to Moving Abroad covers the intermediate playbook that most expatriates use first.
Where to go next
For the underlying US tax framework the exit tax sits on top of, see the country profile at /countries/united-states. For comparison with other countries' exit-tax regimes, read Exit Taxes Explained. For the state-residency layer that has to be severed alongside federal, see State Residency Severance for US Citizens. For pre-renunciation alternatives, start with the US-citizen relocation playbook. General questions are answered at /faq, and /compare lets you benchmark potential destination jurisdictions against the US baseline.