Renouncing U.S. Citizenship: The Exit Tax, Covered Expatriate Tests and Form 8854

I am not going to tell you whether to give up your U.S. citizenship. That is a personal decision with consequences far beyond taxes. What I can tell you is how the tax side works, because the exit is a tax event, and the people who get hurt are the ones who renounce first and read the rules later.

The rules live in 26 U.S.C. 877A, with key definitions borrowed from section 877.

Who is an expatriate, and when

Section 877A(g)(2) defines an expatriate as a U.S. citizen who relinquishes citizenship, or a long-term resident who ceases to be a lawful permanent resident. The expatriation date for a citizen is the date of relinquishment.

Section 877A(g)(4) treats a citizen as relinquishing citizenship on the earliest of several dates, including the date the person renounces nationality before a U.S. diplomatic or consular officer and the date the State Department issues a certificate of loss of nationality. A renunciation or voluntary relinquishment counts only if it is later approved by the issuance of that certificate.

The three covered expatriate tests

The exit tax applies only to covered expatriates. Under section 877A(g)(1)(A), you are a covered expatriate if you meet any one of the three tests in section 877(a)(2):

• The tax liability test. Your average annual net income tax for the five taxable years ending before the expatriation date is more than the inflation-adjusted threshold. The IRS sets it at $206,000 for 2025 under Rev. Proc. 2024-40, and $211,000 for 2026 under Rev. Proc. 2025-32.
• The net worth test. Your net worth is $2,000,000 or more on the expatriation date. This figure is not adjusted for inflation.
• The certification test. You fail to certify under penalty of perjury that you have met the requirements of the Internal Revenue Code for the five preceding taxable years, or fail to submit evidence of compliance the IRS requires. The certification is made on Form 8854.

Here is the part most people miss. The third test has nothing to do with wealth. A person with modest income and assets becomes a covered expatriate simply by failing to certify five years of tax compliance. For Americans abroad who never filed, that is the trap. Getting compliant first, often through the Streamlined Foreign Offshore Procedures, is usually step one of any expatriation plan.

Two exceptions

Section 877A(g)(1)(B) provides exceptions from the tax liability and net worth tests, but not from the certification requirement, for two groups:

• Dual citizens from birth. A person who became at birth a citizen of the United States and of another country, who continues to be a citizen of and taxed as a resident of that other country, and who has been a U.S. resident for not more than 10 taxable years during the 15-taxable-year period ending with the year of expatriation.
• Certain minors. A person who relinquishes citizenship before reaching age 18 and a half, and who has been a U.S. resident for not more than 10 taxable years before relinquishment.

"Resident" in those tests has a specific technical meaning. Many accidental Americans, people born in the United States who left as children, fit the dual citizen exception. They still need to certify compliance.

The exit tax itself: mark-to-market

Section 877A(a)(1) treats all property of a covered expatriate as sold for its fair market value on the day before the expatriation date. Gains are taxed as if realized. Section 877A(a)(3) reduces the total gain by an exclusion amount, $600,000 in the statute, adjusted for inflation: $890,000 for 2025 under Rev. Proc. 2024-40 and $910,000 for 2026 under Rev. Proc. 2025-32.

Certain items are carved out of the deemed sale by section 877A(c): deferred compensation items, specified tax deferred accounts and interests in nongrantor trusts. Those are not ignored. They are subject to separate rules, including withholding and deemed distribution rules, and the Form 8854 instructions describe the treatment and the elections involved.

The Form 8854 instructions also describe a procedure for requesting a deferral of the payment of the exit tax.

Form 8854

Form 8854 is the Initial and Annual Expatriation Statement. According to its instructions, you attach your initial Form 8854 to your income tax return for the year that includes your expatriation date and file by the return's due date. If you are not required to file a return, you send Form 8854 separately by the date the return would have been due, including extensions. Some expatriates must file annual Forms 8854 in later years, for example if they deferred tax or reported certain deferred compensation items or nongrantor trust interests.

The instructions state that if you are subject to section 877A and fail to file Form 8854 when required, or file it with missing or incorrect information, you owe a $10,000 penalty for that year unless the failure is due to reasonable cause and not willful neglect.

The Form 8854 instructions also remind expatriates that if they were a U.S. person for any part of the year, they may still need to file an FBAR for that year.

The tax that follows your gifts

Section 2801 imposes a tax on U.S. citizens and residents who receive gifts or bequests from covered expatriates. The Form 8854 instructions reference it. In practice, that means a covered expatriate's later gifts to American children or grandchildren can carry a U.S. tax cost for the recipients. Rev. Proc. 2025-32 provides that for 2026 the section 2801 tax applies only to the extent the value of covered gifts and bequests received during the year exceeds $19,000. For families with American heirs, this rule can matter as much as the exit tax itself.

Compliance first: what certification requires

The certification test asks whether you met the requirements of the Internal Revenue Code for the five preceding taxable years. For an American abroad, that usually means more than Form 1040. It can include FBARs, Form 8938, Form 8621 for foreign funds and Form 5471 for foreign companies, in addition to correctly reporting all income.

Consider an accidental American: born in the United States, raised in another country, never filed a U.S. return, modest income and savings. The tax liability and net worth tests may not apply, and the dual citizen exception may be available. But until five years of compliance can be certified, the third test makes that person a covered expatriate. That is why the order of operations is compliance first, renunciation second.

There is a practical benefit to doing it in that order. The work of getting compliant tells you the numbers that drive the other two tests: your actual U.S. tax for each of the five years and a documented balance sheet. Those numbers decide whether you are near the tax liability threshold or the $2,000,000 net worth line, and whether timing the expatriation date differently would change the answer. You cannot plan around figures you have not computed.

Before you renounce

• Get fully compliant for the five years before expatriation: returns, FBARs, Form 8938 and any other information returns.
• Compute your five-year average net income tax and your net worth on the planned date, with professional valuations where needed.
• Inventory deferred compensation, retirement accounts and trust interests, which have special rules.
• Think about U.S. heirs and the section 2801 tax.
• Plan the timing. The thresholds and exclusion amount are set by year, and your expatriation date determines which year applies.

Renunciation is permanent. The tax planning should be done before the appointment at the consulate, not after. If you are considering it, let's talk.