US · Journal
Renouncing US Citizenship and the Exit Tax
Who counts as a covered expatriate, how the mark-to-market exit charge is worked out, and the certification year most people get wrong.
Who counts as a covered expatriate, how the mark-to-market exit charge is worked out, and the certification year most people get wrong.
Renouncing US citizenship does not require you to settle your US tax affairs first. The sequencing runs the other way round. You expatriate; then you file an income tax return for the year that contains your expatriation date, with Form 8854 attached; and on that form you certify that you complied with your US federal tax obligations for the five years preceding expatriation. Almost every guide to this subject states it backwards, and the error matters, because the certification is a tax test with a tax consequence rather than a condition anyone checks at the counter.
The IRS states that consequence plainly: "If all federal tax requirements have not been satisfied for the 5 years prior to expatriation, the individual will be subject to the IRC 877 and 877A expatriation tax provisions even if the individual does not meet the monetary thresholds in IRC 877 or 877A." Non-compliance does not stop you renouncing. It makes you a covered expatriate, and the exit tax regime then reaches you whatever your wealth.
This article walks the covered-expatriate tests, how the mark-to-market charge is actually computed, and the routes back for people with years missing. For how we handle an expatriation engagement end to end, see our main page on renouncing US citizenship. To be plain at the outset: we do not advise anyone to renounce, and nothing here is encouragement to.
What people call the exit tax is the mark-to-market regime of IRC section 877A. It is not a tax on the act of renunciation, and it is not charged on everyone who renounces. It reaches one category of person: the covered expatriate. The regime applies both to citizens who have renounced and to long-term residents who have ended US resident status.
If you hold a green card, whether any of this is about you turns on a count of tax years. The Form 8854 instructions define a long-term resident as someone who "was a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year you are no longer treated as a lawful permanent resident". Below that count, giving up the card is not an expatriation for these purposes and the regime does not reach you at all. At or above it, filing Form I-407 or otherwise ending the status puts you in the same position as a renouncing citizen - the same three tests, the same deemed sale, the same Form 8854.
Two details in that definition do most of the damage. It counts tax years, not anniversaries, and a part-year counts - so a card held a little over seven calendar years can straddle eight tax years and tip someone over without any year of it feeling like the eighth. And the count has a carve-out that runs the other way: the instructions say not to count any year in which you were treated as a resident of a foreign country under a tax treaty and did not waive the treaty benefits for residents of that country. That reduces the count, and it is the main planning point for anyone watching the clock - but it carries a sting, because commencing treaty residence elsewhere without waiving benefits and notifying the IRS is itself one of the events that ends resident status. A dual resident can become an expatriate that way without ever filing an I-407.
Three tests, not two. Meeting any one of them makes you a covered expatriate.
Test 1 - the income test. In the IRS's words: "Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation." Two things in that sentence are routinely mangled. It is an average across the period, not any single year's liability; and the period is the five tax years ending before the expatriation date, not "any of the last five calendar years". The amount is indexed, and the one that counts is the amount for your year of expatriation - more than $206,000 for a 2025 expatriation, more than $211,000 for a 2026 expatriation. Amounts for 2027 had not been published when this was written.
Test 2 - the net worth test. Verbatim: "Your net worth is $2 million or more on the date of your expatriation or termination of residency." Note what this figure does not do. It does not move. $2 million is not indexed; it has been the threshold since the 2004 amendments, so unlike the income test there is no current-year amount to look up and anyone telling you it changes annually is describing the wrong test.
Test 3 - the certification test. Verbatim: "You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency." This is the test that catches people of modest means, because it has nothing to do with money at all. Someone with no US assets, no US income and a net worth far below the second test is a covered expatriate if that certification cannot honestly be signed.
The third test is also the only one you can do anything about. Wealth is wealth, and a past year's tax liability is a matter of record; a filing history can be repaired before the certification falls due.
Two narrow exceptions exist - for certain dual citizens from birth, and for people who expatriated before age 18 and a half - and it is important to see exactly how far they reach. They relieve the first two tests only. The Form 8854 instructions are explicit that such individuals "will still be treated as covered expatriates unless they file Form 8854 and certify" compliance for the five tax years preceding expatriation. There is no exception to the certification test.
If you are a covered expatriate, your property is treated as sold at fair market value "on the day before the expatriation date". That wording is load-bearing: it places the deemed gain inside the period when you were still a US person, which is why it lands on the citizen side of a split year.
Gain above an exclusion amount is taken into account for the tax year of the deemed sale. The exclusion is indexed and, like the income test, the operative figure is the one for your year of expatriation: $890,000 for 2025 and $910,000 for 2026. The statutory base is $600,000, adjusted for inflation since 2008; the 2026 figure comes from Revenue Procedure 2025-32, which reduces the amount includible "(but not below zero) by $910,000". Amounts for 2027 had not been published when this was written.
The exclusion is not applied to whichever asset you like. Where the total gain on the gain properties exceeds it, the Form 8854 instructions require the whole exclusion to be allocated across them pro rata by gain, and the amount allocated to any one property cannot exceed that property's own built-in gain.
The deemed sale reaches property generally - real property wherever situated, securities and funds, business and partnership interests. But four classes of asset sit expressly outside it, each with its own mechanic, and this is where most guides go wrong by listing pensions and deferred compensation as mark-to-market property:
Nothing here is actually sold. You report the gain, or the deemed distribution, as though it had been.
One consequence of that structure is worth stating plainly, because it is the thing people ask most often about their retirement savings. The exclusion reduces what is includible by reason of the deemed sale rule. The four classes above are not deemed sold, so the exclusion does not reach them: it does not shelter an IRA, and it does not shelter an employer plan or pension. Those are taxed by their own mechanic, whatever the exclusion figure for your year of expatriation happens to be.
If you owe mark-to-market tax, you can elect to defer payment property by property until the property is disposed of. It is a real option with real conditions. The election is irrevocable; interest runs over the deferral period; you must provide adequate security, such as a bond; and you must irrevocably waive any treaty right that would prevent the IRS assessing or collecting the tax. It cannot be extended beyond the earlier of the due date of the return for the year of your death and the point at which the security stops being adequate. The election is made in Part II, Section D of Form 8854.
This is not the ordinary instalment-agreement route, and it is not a payment plan you ask for after the event. Note also that the IRS has changed where deferral correspondence goes: its stated address is now the Internal Revenue Service unit at 3651 S IH35, MS 4301 AUSC, Austin, TX 78741.
The initial Form 8854 has no deadline of its own. You attach it to your income tax return - Form 1040, 1040-SR or 1040-NR - for the year that includes your expatriation date, and file that return by its due date including extensions. If you are not required to file a return at all, Form 8854 goes on its own to the IRS by the date the return would have been due, including extensions, had you been required to file. The instructions for Form 8854 also direct the original initial or annual form to the Austin unit, which is why the belt-and-braces practice is to attach it and send the original. Our guide to what Form 8854 asks and when it is due walks the form part by part.
Not filing it carries a price of its own. The instructions say that if you are subject to section 877A and required to file for any tax year, and you fail to file, omit required information or include incorrect information, "you will owe a penalty of $10,000 for that year, unless it is shown that such failure is due to reasonable cause and not willful neglect". That $10,000 Form 8854 penalty is charged per year. It is a different thing from the $10,000 FBAR aggregate threshold discussed below: the two share a number and nothing else, one being a penalty per form per year and the other a combined account balance at which a foreign account has to be reported at all.
Many of our clients - second-generation expats, UK residents with a US-born parent, UAE expatriates who arrived decades ago - are "accidental Americans": US citizens by birth or descent who have never lived in the US and may be unaware they have obligations at all.
If that is you, you probably have unfiled years. What those years do is not block a renunciation. They make the certification unsignable, which puts you into covered-expatriate status on test 3 regardless of your means. So the question is not whether you are allowed to renounce. It is whether you want to leave the consulate as a covered expatriate.
There are two routes, and they are not the same thing.
The Relief Procedures for Certain Former Citizens are the expatriation-specific route, and they are narrow. They are open only to citizens - not to long-term residents - who expatriated after 18 March 2010, whose net worth is less than $2,000,000 both at expatriation and when the submission is made, and whose aggregate tax liability is $25,000 or less for the year of expatriation and the five prior years. You file all required returns for those six tax years, and the conduct must have been non-willful. Where they apply the effect is substantial: in the IRS's words, those individuals "will not be 'covered expatriates' under IRC 877A, nor will they be liable for any unpaid taxes and penalties for these years or any previous years", the IRS "will not assert any penalties", and no payment is required. One trap sits in the fine print: for these procedures the net worth test applies "without any exceptions, including the exceptions to covered expatriate status under IRC 877A(g)(1)(b)". So a dual citizen from birth who is relieved of the net worth test for covered-expatriate purposes can still be barred from this relief by the very same figure.
The Streamlined Filing Compliance Procedures are the general offshore catch-up, for taxpayers whose failures were non-willful. Both tracks look back 3 years for returns and 6 years for FBARs. The foreign track carries no miscellaneous offshore penalty; the domestic track carries one of 5% of the highest aggregate balance or value of the foreign financial assets in scope. Note the asymmetry that nobody mentions: the Streamlined look-back for returns is three years, while the certification window is five, so Streamlined on its own does not necessarily produce a signable certification.
Our guide to accidental Americans sets out how a catch-up actually works. Either way, the look-back comes first and the form second.
The sequence people describe - settle everything with the IRS, then renounce - is not the rule, and acting on it causes harm in both directions. Some people defer a decision for years waiting on an IRS clearance that does not exist as a precondition. Others assume that because they renounced first, the US tax year is closed behind them. It is not: the return for the year containing your expatriation date, with Form 8854 attached, is still due, and that is where the covered-expatriate determination is made.
What to do instead: repair the certification window before the expatriation date if you can, because test 3 looks at the five years preceding it. Then file the return and the form on the ordinary deadline afterwards.
The mark-to-market charge is built on fair market value, and valuations on the Part II balance sheet need to be supportable rather than optimistic - particularly for real property and private business interests, where there is no quoted price to point at.
What to do instead: document the valuation methodology at the time, and put professional work where it actually changes the answer rather than across the whole schedule.
Your return for the year of expatriation reports worldwide income for the part of the year you were a US person, not only US-source income. Many expatriates assume the opposite.
What to do instead: work through the foreign earned income exclusion and foreign tax credit position properly. You may owe no additional US tax once foreign taxes paid are credited, but the income still has to be reported.
Holdings in foreign funds and corporations - common in the UK and the UAE - are frequently Passive Foreign Investment Companies. They are not one of the four classes of asset carved out of the deemed sale, so they are swept into it with everything else. Where they bite hardest, though, is the certification window: unreported PFIC holdings across those years are exactly the kind of gap that makes the certification unsignable.
What to do instead: identify every foreign fund and corporate holding at the start, and treat them as a compliance question for the look-back years, not as a special exit-tax calculation.
You will see it said that renouncing - or renouncing while non-compliant - means a permanent bar on ever visiting the US again. That overstates what the provision says.
The provision is the Reed Amendment, and it is immigration law rather than tax law. 8 U.S.C. section 1182(a)(10)(E) makes inadmissible "Any alien who is a former citizen of the United States who officially renounces United States citizenship and who is determined by the Attorney General to have renounced United States citizenship for the purpose of avoiding taxation by the United States".
Read what that actually requires. Inadmissibility turns on a determination that the renunciation was for the purpose of avoiding taxation. It does not follow from renouncing, it does not follow from being a covered expatriate, and it does not follow from owing exit tax; nor is it a provision the IRS administers. Whether it could be reached in any individual case is a question of US immigration law and belongs with immigration counsel rather than a tax adviser. We state what the statute says and go no further than that.
The most consequential fact on Form 8854 is your expatriation date. It fixes the day before, the certification window, which year's return the form attaches to, and which year's indexed figures apply.
For a citizen it is the earliest of four dates: the date you renounced US nationality before a US diplomatic or consular officer; the date you furnished the Department of State a signed statement of voluntary relinquishment of an expatriating act; the date the Department of State issued a certificate of loss of nationality; or the date a US court cancelled your naturalisation certificate. The first two apply only where the act was "subsequently approved by the issuance to the individual of a certificate of loss of nationality by the U.S. Department of State", so a certificate issued later can fix a much earlier date - which is sometimes worth a great deal and sometimes expensive.
For a long-term resident the list is a different one: the earliest of filing Form I-407 with a US consular or immigration officer; a final administrative order of abandonment, or the final judicial order if that order was appealed; a final administrative or judicial order of removal under the Immigration and Nationality Act; or commencing residence in another country under a tax treaty without waiving the treaty benefits and notifying the IRS. The last of those is the one people miss, because nothing is handed in and no appointment is ever made.
The consular steps themselves, the documents required and any fee payable are matters for the Department of State. Confirm those on the Department of State's own pages rather than relying on any figure quoted elsewhere, and take the nationality-law questions to immigration counsel. Our work starts at the tax consequences of the date.
The expensive outcomes in this subject are rarely the headline exit tax. They are:
At Next Tax Source, every return and every Form 8854 we prepare is reviewed and signed off by our licensed reviewer - an IRS Enrolled Agent who is also ACCA-qualified - and you sign and file it yourself. We do not advise anyone to renounce; the people who file these forms have already decided, usually with their own immigration counsel. Our job is to make the position right.
If you are an accidental American, a long-term expat, or someone whose decision is already made, read our detailed guide to accidental Americans and establish your filing history first. Many people discover they owe far less than expected once the prior years are prepared properly.
If your decision is made and you want the tax position modelled before anything becomes irreversible, we will establish whether the certification can honestly be signed, settle the expatriation date, build the Part II balance sheet, and prepare the dual-status return and Form 8854 as one package so the two agree.