IRC §877A sorts a covered expatriate's wealth into three buckets. The exclusion and the deferral election reach only one — not the one holding your pension.
If you are a covered expatriate, IRC §877A does not tax your wealth as one pot. It sorts it into three buckets — property caught by the mark-to-market deemed sale, deferred compensation items, and specified tax-deferred accounts — and each bucket has its own charging mechanic, its own character of income and its own timing. The consequence almost nobody is told: the exclusion amount and the deferral election both reach the first bucket only, so an expatriate whose wealth sits mainly in retirement arrangements can face an unsheltered, non-deferrable charge in the year of expatriation while believing the opposite.
This article is about what follows from the sorting, not just the sorting itself. For the inventory question — which assets are swept into the deemed sale and how they are valued — see our companion piece on the deemed sale and what counts as your asset on the day before. None of this engages at all unless you are a covered expatriate in the first place, which is a separate question with three tests of its own.
§877A(a)(1) is blunt: “All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.” Gain is taken into account for the year of the sale, and loss is too, except that the wash-sale rule in §1091 is switched off for it.
This is the bucket everyone writes about, and it is the only generous one. It produces gain of the character the underlying asset would have produced — so long-held securities and real property generally give long-term capital gain — and it is the only bucket the exclusion amount can reduce. The exclusion is indexed annually and the operative figure is the one set for your year of expatriation, not the year you file, so confirm the current amount against the IRS before relying on any figure you read anywhere, including in last year's guidance.
A deferred compensation item is defined widely in §877A(d)(4): an interest in a plan or arrangement described in §219(g)(5), any interest in a foreign pension plan or similar retirement arrangement or program, any item of deferred compensation, and any property or right to property receivable for services to the extent not already taken into account under §83. Limb (B) is the one that decides most UK and Gulf cases, because it pulls a non-US pension squarely into this bucket.
Within the bucket, everything turns on one binary. §877A(d)(3) makes an item eligible only where all of the following hold:
Eligibility is therefore not a property of the plan. It is a property of the plan plus two acts by you, and the notification act has the hardest deadline in the whole expatriation process. The notice goes to the payor on Form W-8CE, and the Form 8854 instructions fix the window as the earlier of the day before the first distribution on or after your expatriation date, or 30 days after your expatriation date. Because it is the earlier of two dates, a payment falling shortly after you expatriate can compress it to almost nothing.
Eligible items are not taxed at expatriation. Instead §877A(d)(1)(A) requires the payor to “deduct and withhold from any taxable payment to a covered expatriate with respect to such item a tax equal to 30 percent thereof.” A taxable payment is defined as any payment to the extent it would have been includible in your gross income had you remained a US citizen or resident. You then file Form 8854 annually to certify that no distribution was received, or to report the ones that were.
Ineligible items are taxed immediately, in full. §877A(d)(2) treats you as having received “the present value of the covered expatriate's accrued benefit” on the day before the expatriation date, as a distribution under the plan. For property receivable for services, the rights are instead treated as becoming transferable and no longer subject to a substantial risk of forfeiture on that same day. No early-distribution tax applies by reason of that treatment, and later distributions are adjusted to reflect it — but the inclusion is ordinary income, in one year, on the whole accrued value.
A foreign pension will ordinarily land here, not because of anything about the pension but because a non-US payor has no reason to elect into US withholding obligations under (d)(3)(A)(ii). That is the single largest surprise in the regime.
§877A(e)(1) treats a covered expatriate as “receiving a distribution of his entire interest in such account on the day before the expatriation date”. Again no early-distribution tax applies by reason of that treatment, and appropriate adjustments are made to later distributions.
The list in §877A(e)(2) is closed, and it is worth reading carefully because the exclusions inside it matter:
The §408(k) and §408(p) carve-outs mean a SEP and a SIMPLE are not specified tax-deferred accounts. They are deferred compensation items instead, and run through bucket two. An employer plan such as a 401(k) likewise sits in bucket two — which is why the direction of a rollover before the expatriation date changes the answer, not the amount. Roll an employer plan into an IRA and you have moved money from a bucket where withholding at source was available into one where a deemed distribution of the entire balance is automatic.
This is the point that separates a filing answer from a planning answer, and it is in the statute in plain sight. §877A(a)(3)(A) provides that “the amount which would (but for this paragraph) be includible in the gross income of any individual by reason of paragraph (1) shall be reduced (but not below zero)” by the exclusion amount.
Paragraph (1) is the mark-to-market deemed sale. An inclusion under (d)(2) or (e)(1) does not arise by reason of paragraph (1); it arises by reason of (d) or (e). The exclusion therefore cannot touch it. For someone whose balance sheet is a modest house, a brokerage account and a large retirement pot, the headline exclusion figure that dominates every article on expatriation may shelter the smallest part of the charge.
The §877A(b) election to defer payment of the exit tax is widely described as a way to postpone the whole charge until the asset is sold or you die. It is not. §877A(b)(1) applies “with respect to any property treated as sold by reason of subsection (a)”, and (b)(2) measures the deferrable amount as the tax arising “solely by reason of subsection (a)”.
So the two buckets that produce ordinary income with no exclusion are also the two for which no deferral exists. There is no election, no security arrangement and no instalment path for an ineligible pension inclusion or a deemed IRA distribution — the tax is due with the return for the year that includes your expatriation date. We set out how the deferral election itself works, including its security and treaty-waiver conditions, in our guide to Form 8854.
§877A(d)(5) is one sentence and it can be the largest line on the schedule: “Paragraphs (1) and (2) shall not apply to any deferred compensation item to the extent attributable to services performed outside the United States while the covered expatriate was not a citizen or resident of the United States.”
Both conditions have to hold at the time the services were performed — outside the US, and while you were neither a US citizen nor a US resident. For a naturalised citizen who worked abroad for years before the US chapter of their career, or a long-term resident whose home-country pension was largely funded before the green card, a material part of the pot may fall outside both the withholding regime and the deemed-distribution regime altogether. The statute prescribes no apportionment formula, and the allocation is a facts-and-circumstances exercise addressed in IRS guidance rather than a percentage you can look up, so it needs documenting from employment records rather than estimating.
It is tempting to read withholding on an eligible item as a prepayment you reconcile later. It is not. §877A(d)(6)(B) provides that any item subject to that withholding “shall be subject to tax under section 871” — the nonresident charging provision — and (d)(6)(C) switches off withholding under §1441 and chapter 24 for the same item.
Two things follow. The withheld amount is the tax on that income, not an instalment against a graduated computation you can reduce with deductions. And because the treaty waiver in (d)(3)(B)(ii) is irrevocable, the rate cannot later be cut by the treaty of wherever you settle. If you are moving somewhere whose treaty with the US would otherwise have reduced the rate on pension income, electing into the eligible class is a permanent price, paid to avoid an immediate charge on the entire accrued value. That trade-off is the real decision, and it is specific to each plan, each treaty and each expected drawdown pattern.
In practice the sequence matters as much as the law:
The year of expatriation is also usually a dual-status year, which changes how the whole return is assembled; we cover that separately in the dual-status return after renouncing.
Next Tax Source builds the bucket-by-bucket schedule, documents the §877A(d)(5) position from employment history, and prepares the Form 8854 and W-8CE package to a sign-off state. Every return and every position is reviewed and signed by a licensed professional — a CPA or Enrolled Agent on the US side — before anything is filed; we prepare, humans sign. If you are weighing an expatriation date, our renouncing US citizenship service page sets out the engagement, pricing is published, and you can book a consultation to walk the schedule through before any date is fixed.
This article explains general principles of US federal tax law and is not advice on your circumstances. Indexed amounts change annually and the operative figure is the one for your year of expatriation — confirm it against current IRS guidance before acting.