Leaving the U.S. tax system is not as simple as moving abroad or handing back a passport. For U.S. citizens who renounce and long-term green card holders who give up their status, Form 8854 and the Section 877A exit tax are the final, and often most expensive, step. This guide explains who is a covered expatriate, how the mark-to-market exit tax works, the current-year thresholds and exclusion, and why filing Form 8854 correctly is what actually ends your U.S. tax obligations.
What Is Form 8854?
Form 8854 is the Initial and Annual Expatriation Statement. It is filed by U.S. citizens who renounce their citizenship and by long-term residents (certain green card holders) who terminate their residency, and it does three things: it certifies that you complied with all U.S. federal tax obligations for the five years before expatriation, it reports your assets and net worth, and it determines whether you are a covered expatriate subject to the exit tax.
Who Is a Covered Expatriate?
You are a covered expatriate, and therefore exposed to the exit tax, if you meet any one of three tests on the date you expatriate. Meeting even one is enough.
The Three Covered Expatriate Tests
Important- Net worth test: your net worth is $2 million or more on the expatriation date. This figure is not indexed for inflation and has been $2 million for years.
- Tax liability test: your average annual net U.S. income tax for the five years ending before expatriation exceeds an inflation-adjusted amount, $211,000 for 2026 ($206,000 for 2025). This is the tax, not income.
- Certification test: you fail to certify on Form 8854, under penalties of perjury, that you have complied with all U.S. federal tax obligations for the five years preceding expatriation.
If you meet none of the three, you are not a covered expatriate and the exit tax does not apply, but you still file Form 8854.
Exceptions for Dual Citizens and Young Expatriates
ExceptionTwo narrow exceptions can spare someone from the net worth and tax-liability tests (though not the certification test):
- Dual citizens at birth who became citizens of another country at birth, remain taxed as that country's resident, and were a U.S. resident for no more than 10 of the last 15 years.
- Certain expatriates under age 18.5 who expatriate before reaching that age and were U.S. residents for no more than 10 years.
Both exceptions still require certifying five years of tax compliance on Form 8854. Failing that certification makes the person covered regardless.
How Does the Section 877A Exit Tax Work?
The exit tax is a mark-to-market regime: a covered expatriate is treated as having sold all of their worldwide property at fair market value the day before expatriation, and the resulting net gain is taxed. For 2026, the first $910,000 of that gain is excluded; only the excess is taxed, generally at capital gains rates.
The Mark-to-Market Deemed Sale
- Every asset you own, stocks, real estate, business interests, collectibles, is treated as sold at FMV the day before you expatriate.
- The net gain across all assets is computed as if you had actually sold.
- The first $910,000 of net gain (2026 figure; $890,000 for 2025) is excluded.
- Net gain above the exclusion is taxed at the applicable capital gains rates.
- You may elect to defer the exit tax on specific property until it is actually sold, but this requires posting adequate security and paying interest.
Three Asset Types Taxed Outside the Mark-to-Market Rule
CautionNot all property runs through the deemed-sale calculation. Three categories have their own regimes:
- Deferred compensation (pensions, certain stock options): "eligible" deferred comp is subject to 30% withholding on future distributions; "ineligible" deferred comp is treated as received the day before expatriation.
- Specified tax-deferred accounts (IRAs, 529s, HSAs, certain others): treated as fully distributed the day before expatriation, taxed as ordinary income, with no early-withdrawal penalty.
- Interests in non-grantor trusts: future distributions are subject to 30% withholding to the extent they would have been taxable.
These special rules can produce tax even when the mark-to-market gain falls under the $910,000 exclusion, so they must be modeled separately.
Do Green Card Holders Face the Exit Tax?
Yes. A long-term resident, a green card holder who held the card in at least 8 of the last 15 tax years, who abandons the green card or is treated as terminating U.S. residency is subject to the same expatriation rules as a citizen, including the covered expatriate tests and the Section 877A exit tax.
This catches many people off guard. Simply letting a green card lapse, moving abroad, or claiming treaty non-residency can be an expatriating act for a long-term resident, triggering Form 8854 and potential exit-tax exposure if the covered-expatriate tests are met. Long-term residents considering giving up a green card should run the analysis before they act, because timing and pre-expatriation planning can change the result substantially.
What Happens If You Do Not File Form 8854?
Failing to file a required Form 8854 has an outsized consequence: you are automatically treated as a covered expatriate, exposing you to the full Section 877A exit tax regardless of your actual net worth or income, and you can be assessed a $10,000 penalty. Just as importantly, your expatriation is not complete for tax purposes until the form is filed, so you may continue to be treated as a U.S. taxpayer with worldwide filing obligations.
The certification on Form 8854 also requires five years of prior U.S. tax compliance. If you have unfiled returns or unreported foreign income from before expatriation, you generally need to fix that first, often through the Streamlined Filing Compliance Procedures, the SFOP track for those living abroad or the SDOP track for residents, so you can truthfully certify compliance.
How Does Form 8854 Fit With Your Other Filings?
Expatriation rarely involves only one form. A clean exit usually requires:
- A dual-status or final-year Form 1040 for the year of expatriation.
- Form 8854 itself, attached to that return and also filed separately with the IRS.
- Final FBAR and Form 8938 filings for foreign accounts and assets held during the U.S. period.
- Any catch-up filings, Form 5471 for foreign corporations, Form 3520 for foreign trusts and gifts, needed to support the five-year compliance certification.
Because covered-expatriate status hinges partly on the certification, the cleaner your prior five years are, the lower your risk. For Americans abroad who are behind, resolving the backlog before expatriating is the single most valuable step.
Bottom Line
Form 8854 is the form that formally ends your U.S. tax life, and it determines whether you walk away clean or owe the Section 877A exit tax. You are a covered expatriate if your net worth is $2 million or more, your average annual U.S. tax exceeds $211,000 (2026), or you cannot certify five years of compliance, and covered expatriates face a deemed sale of worldwide assets with the first $910,000 of gain excluded for 2026. Long-term green card holders are squarely within these rules, and failing to file Form 8854 makes you covered automatically. Pre-expatriation planning, done before you renounce or surrender the card, is where the exit tax is reduced or avoided.
If you are considering renouncing U.S. citizenship or giving up a green card, our international tax and cross-border tax teams can run the covered-expatriate analysis, model the exit tax, clean up any prior-year compliance, and prepare Form 8854 and your final return. Have questions about the exit tax or expatriation? Contact TS CPA for a free consultation. We respond within the same day.