Picture this. You have built a successful career abroad, accumulated savings, and decided it is time to formally cut ties with the United States by renouncing citizenship or surrendering your long-term green card. Then your accountant drops a sentence that ruins the week: "The IRS may want to tax everything you own — even though you have not sold a single thing."
That sentence is not a scare tactic. It is the heart of Section 877A, the mark-to-market regime that treats a covered expatriate as if she sold all of her worldwide property the day before she walks away. The bill can run into seven figures for high-net-worth individuals, and the paperwork that controls whether you pay it — Form 8854 — is unforgiving.
This guide walks through who pays, how the calculation works, the 2026 inflation-adjusted thresholds, and the planning moves that determine whether you exit clean or hand a parting gift to the U.S. Treasury.
What Section 877A Actually Does
Section 877A of the Internal Revenue Code was enacted in the Heroes Earnings Assistance and Relief Tax Act of 2008 and applies to anyone who expatriated on or after June 17, 2008. It replaced an older alternative tax regime that simply extended income tax jurisdiction for ten years after expatriation. The new rule is far more aggressive in one respect and far cleaner in another.
The aggressive part: the law deems you to have sold every asset you own the day before your expatriation date at fair market value. Built-in gains get pulled into your final U.S. return. The cleaner part: once the exit tax is paid (or deferred), the U.S. generally lets you go, with a few residual obligations tied to deferred compensation, trust distributions, and gifts to U.S. persons.
The mechanics turn on a single binary classification. You are either a covered expatriate — in which case Section 877A bites — or a non-covered expatriate, in which case you owe nothing beyond your normal final-year return. The classification is determined by three tests, and meeting even one of them puts you in the covered bucket.
The Three Covered Expatriate Tests for 2026
The IRS uses three independent tests. Fail any one and you are covered, regardless of how the other two break.
1. The Net Income Tax Test
Your average annual net U.S. federal income tax liability for the five tax years ending before the date of expatriation must be below an inflation-adjusted threshold. For 2026, the threshold is $211,000 (up from $206,000 in 2025 and $201,000 in 2024).
A common misread: this is your tax liability, not your income. Someone earning $400,000 a year with aggressive deductions, foreign earned income exclusions, or foreign tax credits may have a five-year average tax bill well below $211,000 and pass this test cleanly. Conversely, a single year with a big stock sale or RSU vesting event can push the five-year average over the line.
2. The Net Worth Test
If your worldwide net worth equals or exceeds $2 million on the date of expatriation, you are covered. This threshold has not been indexed for inflation since 2008 — a deliberate policy choice that has dragged more middle-class long-term green card holders into the regime as asset prices have climbed.
Net worth here is broader than many expect. It captures real estate, brokerage accounts, retirement balances, closely held business interests, beneficial interests in trusts, intellectual property, art and collectibles, deferred compensation accrued benefits, cash, and crypto. Liabilities — mortgages, margin loans, student debt — net against the gross figure, but contingent liabilities generally do not count.
Gifts made shortly before expatriation to dilute net worth do not work the way some hope. The IRS has anti-abuse rules that pull recent transfers back into the calculation, and gifts above the annual exclusion still require Form 709 filing, which travels with your final-year return.
3. The Certification Test
The third test is procedural and surprises people. Even if your tax history is modest and your net worth is well under $2 million, you become a covered expatriate if you cannot certify under penalties of perjury — on Form 8854 — that you have complied with all federal tax obligations for the five preceding tax years.
That means returns filed, taxes paid, FBARs submitted, and information returns (Forms 5471, 8938, 3520, etc.) properly attached. A missed Form 5471 or a forgotten FBAR can sink the certification and convert a non-covered expatriate into a covered one, triggering the mark-to-market calculation on every appreciated asset.
This is why "clean up your last five years of filings before you expatriate" is the single most repeated piece of advice in this area. The IRS Streamlined Filing Compliance Procedures are often used to get current before renunciation.
The Mark-to-Market Calculation
Once you are classified as covered, Section 877A applies a deemed sale on the day before your expatriation date. Each asset is treated as sold at fair market value, gains and losses are netted, and the result flows into your final-year Form 1040.
For 2026, the exclusion amount is $910,000 (up from $890,000 in 2025 and $201,000 — yes, the same number with very different meaning — in 2024). The exclusion is allocated pro rata across the gains on different asset classes. So if you have $2 million of net gain across a stock portfolio and a piece of investment real estate, roughly the first $910,000 is exempt and the remaining $1.09 million is taxed at the applicable capital gains rate.
A few mechanical points worth knowing:
- Losses recognized are limited. Wash sale and related-party loss rules apply as if the deemed sale were a real one.
- Step-up in basis. Property held when you became a U.S. resident is generally stepped up to its fair market value on that residency-start date for exit tax purposes — this prevents the U.S. from taxing pre-immigration appreciation.
- Character matters. Long-term capital assets get capital gains rates; ordinary-income property (inventory, depreciation recapture, IRC 1245 property) gets ordinary rates. The exclusion does not transform character.
- Reporting on Form 8854 Part IV. You list every asset, its basis, its fair market value, and the resulting gain or loss. The detail expected is similar to a comprehensive personal balance sheet plus a cost basis schedule.
Asset Categories That Do Not Mark-to-Market
Three categories are carved out of the deemed sale and follow their own rules. Understanding the carve-outs is often where the planning lives.
Eligible Deferred Compensation Items
If your deferred compensation comes from a U.S. payor (or a foreign payor that elects U.S. treatment), and you irrevocably waive any treaty benefits that would reduce U.S. withholding, the item is "eligible." You file Form W-8CE with the payor within 30 days of expatriation, and the payor withholds 30 percent from each distribution as it is paid out over the years. The principal is not marked to market at exit — but every dollar that ultimately comes out is taxed at the full statutory rate.
This includes most U.S. qualified retirement plans, 401(k)s, 403(b)s, and certain nonqualified deferred compensation governed by Section 409A.
Ineligible Deferred Compensation Items
Foreign pensions and other deferred comp that fail the eligible test are treated harshly: the present value of your accrued benefit on the day before expatriation is included in income at exit, taxed at ordinary rates, with no exclusion amount. Future distributions are then received tax-free in the U.S. (you have already paid).
The arithmetic often favors the eligible route, but it requires payor cooperation that foreign plans rarely provide.
Specified Tax-Deferred Accounts
IRAs, 529 plans, ABLE accounts, Coverdell ESAs, HSAs, and Archer MSAs are not marked to market. Instead, the entire account balance is treated as distributed in full on the day before expatriation, includible in income at ordinary rates. The 10 percent early withdrawal penalty does not apply, but the income recognition is real and there is no exclusion amount.
For someone with a $1.5 million traditional IRA, the exit tax effect is roughly the same as taking a full lump-sum distribution that year, which usually means a top marginal bracket hit.
Beneficial Interests in Nongrantor Trusts
Interests in nongrantor trusts are not marked to market. Instead, when the trust later makes a distribution to the (now former) covered expatriate, the trustee withholds 30 percent of the taxable portion and the expatriate is deemed to have waived any treaty rate reduction. Grantor trusts are different — the assets the expatriate is deemed to own are pulled into the mark-to-market regime.
Form 8854: The Document That Decides Everything
Form 8854 — Initial and Annual Expatriation Information Statement — is the linchpin of the entire regime. It does three things at once:
- Notifies the IRS that you have expatriated and provides the date.
- Certifies five-year tax compliance under penalties of perjury (or fails to, triggering covered status).
- Reports the mark-to-market balance sheet and gain calculation for covered expatriates.
The form is attached to your final dual-status or full-year Form 1040 for the year of expatriation and is due on the same date — generally April 15 of the following year, extendable to October 15. A separate copy is mailed to the Department of the Treasury in Philadelphia.
Failure to file Form 8854 on time triggers a $10,000 penalty — and, more importantly, may cause you to be treated as a covered expatriate solely because you failed the certification test.
For covered expatriates, Form 8854 has a continuing role. As long as you have any eligible deferred compensation items being paid out, specified tax-deferred accounts in payout, or interests in nongrantor trusts that distribute, you must continue to file Form 8854 annually until those items are exhausted.
The Deferral Election
The cash crunch of paying tax on a deemed sale of illiquid assets — a closely held business, a piece of real estate, art — is real. Section 877A(b) lets a covered expatriate elect to defer the exit tax on individual assets until the asset is actually sold or until death.
The trade-offs:
- Interest accrues at the underpayment rate until the deferred tax is paid.
- Security required. You must post an adequate bond or other collateral, typically a letter of credit or a security agreement on the asset itself, in favor of the IRS.
- Treaty waiver. You must irrevocably waive any treaty benefit that would prevent collection of the deferred tax.
- Per-asset election. You can defer on some assets and pay current on others.
The deferral can be the difference between a manageable exit and a forced fire sale. It is administered through the IRS office in Austin, Texas, and the paperwork is real — most practitioners coordinate the filing with the final 1040.
Long-Term Green Card Holders: Often Overlooked
Section 877A does not only apply to citizens. A long-term resident — someone who held a green card in at least 8 of the prior 15 tax years — who ceases to be a lawful permanent resident is also tested under the three covered-expatriate prongs.
This catches a surprising number of professionals who came to the U.S. on work visas, eventually got a green card, and after a decade decide to return home. Many do not realize that surrendering the green card via Form I-407, or being deemed to have abandoned it under a tax treaty tiebreaker, triggers the exit tax analysis exactly as renunciation of citizenship would.
Two important quirks for green card holders:
- The 8-of-15 count is on tax years, and partial years count as full years.
- Treaty tiebreakers. If you claim non-resident status under an income tax treaty for a year while still holding the green card, that year may count against you under the long-term resident definition.
A common planning move is to surrender the green card before crossing the 8-year line, sometimes years earlier than the holder originally planned, to escape the regime entirely.
Gifts and Bequests After Expatriation: Section 2801
A trap that sits outside Section 877A but in the same neighborhood: Section 2801 imposes a tax on U.S. recipients of gifts or bequests from covered expatriates, at the highest gift or estate tax rate then in effect (currently 40 percent). The recipient — not the donor — files Form 708 and pays the tax.
This means even after a clean exit, future transfers to U.S. children, grandchildren, or other beneficiaries can trigger a separate transfer tax bill on the recipient side. Many covered expatriates structure post-expatriation transfers through non-U.S. trusts or accelerate gifts into pre-expatriation years to mitigate this exposure.
Common Mistakes That Trigger Avoidable Tax
- Missing FBARs in any of the prior five years. A single overlooked foreign account can blow the certification test.
- Failing to step up basis for pre-residency appreciation. Many preparers default to historical cost; you should reconstruct fair market value as of your residency-start date for assets acquired before that date.
- Ignoring Form W-8CE for deferred comp. The 30-day window is hard. Miss it and otherwise-eligible items convert to ineligible, triggering immediate inclusion.
- Forgetting the dual-status return mechanics. Most expatriates file a dual-status year — resident for the pre-expatriation portion, nonresident for the post-expatriation portion — with specific income allocation rules. Skipping this leaves money on the table or invites audit.
- Treating crypto and digital assets as off-balance-sheet. They are property. They get marked to market just like a brokerage account, and the IRS has been explicit that wallet-level basis tracking is required.
- Underestimating the closely held business valuation. A defensible third-party appraisal is essentially mandatory for any business interest with material value. Self-prepared valuations rarely survive examination.
Pre-Expatriation Planning Moves
The decisions that matter most are made in the 12 to 36 months before the expatriation date.
- Realize gains strategically. If you are going to be a covered expatriate anyway, accelerating gains into pre-expatriation years can sometimes use up basis or character mismatches favorably — though usually the deemed sale is at least as good.
- Use up the lifetime gift tax exclusion. Pre-expatriation gifts to U.S. persons use the donor's lifetime exclusion. Post-expatriation, those same gifts hit the recipient under Section 2801 at 40 percent with no exclusion.
- Reposition retirement assets. Roth conversions before exit can change ordinary income into already-taxed basis, sometimes reducing the harshness of the specified tax-deferred account inclusion.
- Clean up filings. Streamlined Filing Compliance Procedures, delinquent FBAR submission, or quiet disclosures should be completed before the final-year return. Certification is everything.
- Time the expatriation date. The exclusion amount applies once per expatriation; the threshold tests are based on tax years. A January expatriation gives you a partial-year resident return; a December expatriation pulls a full year of worldwide income into the U.S. base.
Keep Your Cross-Border Records Audit-Ready
Whether you are preparing for expatriation or simply running a U.S. tax life with foreign accounts and assets, the difference between a clean Form 8854 and an expensive one comes down to records. Cost basis from a decade ago, foreign pension statements, business valuation history, and FBAR filings need to be reconstructible on demand — not invented during an audit.
Beancount.io gives you plain-text accounting that travels with you across borders and tax regimes. Every transaction is version-controlled, auditable line by line, and free from vendor lock-in — so when the day comes to fill out Form 8854 or rebuild a basis schedule for residency-start step-ups, the data is already in the format your CPA needs. Get started for free and keep your worldwide books the way the IRS now expects you to.
This article is general information, not legal or tax advice. The expatriation rules interact with treaty positions, state residency, and immigration law in ways that depend on individual facts. Consult a qualified cross-border tax advisor before making decisions that touch Section 877A.