Exit tax and covered expatriate status

The US exit tax is a one-time tax under IRC §877A that applies only to certain people — called "covered expatriates" — when they give up US citizenship or long-term permanent residency, taxing the unrealized gains on their worldwide assets as if everything had been sold the day before they left the US tax system. Most people who renounce citizenship or a green card never trigger this tax at all, since it only applies once you cross specific net worth, tax liability, or compliance thresholds. TFX's US exit tax guide covers the full framework behind this rule.

You're a covered expatriate if you meet any one of three tests: your worldwide net worth is $2 million or more on your expatriation date, your average annual US tax liability over the five years before expatriating exceeds $211,000 (2026), or you can't certify five years of complete federal tax compliance on Form 8854. This applies to long-term green card holders as well as citizens — someone who held a green card in at least 8 of the last 15 tax years faces the same three tests when they abandon that residency. TFX's US exit tax guide covers each test in detail.

The IRS treats your worldwide property as if it were sold at fair market value the day before you expatriate, calculates the net gain across everything after subtracting cost basis, and then taxes only the portion of that gain above a $910,000 (2026) exclusion — applied once against your total net gain, not per asset. Certain items — deferred compensation, specified tax-deferred retirement accounts, and nongrantor trusts — are carved out of this calculation entirely and taxed under their own separate rules instead. TFX's US exit tax guide walks through this calculation step by step.

Mark-to-market is the deemed-sale mechanism at the heart of the exit tax — rather than waiting for you to actually sell your assets, the IRS pretends you sold virtually everything you own worldwide at fair market value the day before expatriation, creating taxable gain even though no real transaction happened. This is what makes the exit tax unusual compared to normal capital gains tax: the trigger is your expatriation date itself, not an actual sale, which is why asset valuations and cost-basis records matter enormously in the months before renouncing. TFX's US exit tax guide explains how this deemed sale is applied across different asset types.

Only if you're a covered expatriate — renouncing citizenship by itself doesn't trigger the exit tax; it's the net worth, tax liability, or compliance test that does, and most people who renounce fall under all three thresholds and owe no exit tax at all. The same rule applies to long-term green card holders who formally abandon their residency, since the exit tax framework treats a qualifying green card abandonment the same as a citizenship renunciation for this purpose. TFX's US exit tax guide covers who actually ends up owing this tax.

The most effective approach is staying below the covered-expatriate thresholds before you expatriate — keeping net worth under $2 million, average tax liability under $211,000, and making sure you can certify five years of complete tax compliance, since even a small filing gap like a missing FBAR can fail that certification regardless of how much tax you actually owed. Timing also matters: a major asset sale, business exit, or inheritance shortly before expatriating can push you over these thresholds, so it's worth reviewing your position well before your renunciation appointment rather than after; those already over the thresholds should also check whether the IRS Relief Procedures for Certain Former Citizens apply, since that program can eliminate exit tax entirely for eligible accidental Americans. TFX's US exit tax guide and relief procedures guide cover these strategies in more detail.

Form 8854, the Initial and Annual Expatriation Statement, is what you file with your final tax return to certify five years of tax compliance and report your net worth and tax liability, determining whether you're a covered expatriate — it's due with your final return, including any extensions, typically by April 15 of the following year. Filing it isn't optional even if you owe zero tax: skipping it, or being unable to certify full compliance on it, is itself one of the three tests that can make you a covered expatriate, and in limited situations — like eligible deferred compensation or nongrantor trust reporting — an annual Form 8854 filing can continue for years afterward. TFX's US exit tax guide covers this filing requirement in full.

No — specified tax-deferred accounts like IRAs and 401(k)s are carved out of the standard mark-to-market deemed-sale calculation and instead follow their own separate rules, generally treated as if fully distributed to you the day before expatriation for income tax purposes, rather than taxed as a capital gain. Related deferred compensation follows its own split: "eligible" deferred compensation is instead subject to 30% withholding on future payments rather than an immediate deemed distribution, which typically requires filing Form W-8CE with the plan administrator by the earlier of 30 days after expatriation or your first distribution. TFX's US exit tax guide covers how retirement accounts and deferred compensation are treated differently from other assets.

No — California does not currently have an enacted exit tax; what people usually mean by "California exit tax" is either the risk of remaining taxable after a poorly documented departure, or Proposition 40, a November 3, 2026 ballot measure that would impose a one-time tax of up to 5% on covered assets over $1 billion — which hasn't been voted on yet and isn't specifically aimed at people relocating. An earlier wealth-tax proposal (AB 2088), which would have applied a 0.4% annual tax on worldwide net worth above $30 million, died in the legislature and never became law. This is entirely separate from the federal exit tax discussed elsewhere on this page, which is a real, currently enacted IRS rule under IRC §877A. TFX's California exit tax guide covers the actual legal status of these state-level proposals.

There isn't one — "exit tax" and "expatriation tax" are two names for the exact same IRC §877A regime, used interchangeably even within IRS and TFX materials; you'll also see it called the "American exit tax" or "federal exit tax," but they all refer to the identical set of rules. The only real distinction worth knowing is between this federal tax and any state-level "exit tax" some people ask about (like California's, which doesn't currently exist) — those are entirely separate concepts that just happen to share similar names. TFX's US exit tax guide uses both terms throughout to describe this single regime.