US Exit Tax: Are You a Covered Expatriate?

US exit tax: an introduction

The US exit tax is a one-off income tax charge on people who give up US citizenship, or a long-term green card, and are treated as covered expatriates. It treats you as having sold everything you own on the day before you expatriate. Gains above an exclusion amount are then taxed. Most people who renounce are not covered expatriates, but you must confirm that rather than assume it.

This article explains who the charge applies to, how the three tests work and what you file. Our full guide to IRS Streamlined Filing from the UK covers getting up to date first, and our expatriation service covers the filings around renunciation.

Where the US exit tax comes from

The charge sits in section 877A of the Internal Revenue Code. It applies to expatriation after 16 June 2008. The IRS summarises the rules on its expatriation tax page. Notably, the rules are about tax, not nationality. The State Department handles the legal act of renunciation separately.

Who counts as an expatriate

An expatriate is a US citizen who relinquishes citizenship, or a long-term resident who stops being a lawful permanent resident. A long-term resident is a green card holder in at least 8 of the last 15 tax years, as the Form 8854 instructions explain. Therefore, a green card holder who has lived in Britain for years can still be caught.

Why most people never pay it

Most Americans who renounce from Britain are not covered expatriates. Their average US tax is low because UK tax is credited, and their net worth is under $2 million. As long as their filings are in order, the US exit tax never arises. Nevertheless, the tests must be worked through and documented on Form 8854, even when the answer is no.

What are the three covered expatriate tests?

You are a covered expatriate if you meet any one of three tests: the income tax test, the net worth test or the certification test. Meeting just one is enough. Only covered expatriates face the US exit tax.

The average income tax test

The first test looks at your average annual net US income tax for the five years before expatriation. If that average exceeds a figure indexed each year, you are covered. The IRS gives $206,000 for 2025. For 2026, the figure is $211,000 under Revenue Procedure 2025-32. Importantly, this is US tax paid after credits, so many UK residents fall well below it.

The $2 million net worth test

The second test asks whether your net worth is $2 million or more on the date you expatriate. Unlike the other figures, this amount is not indexed. Net worth includes your home, pensions, investments and interests in trusts. Consequently, a London homeowner with a good pension can cross the line without feeling wealthy. A careful valuation of every asset comes first.

Valuations are made in dollars at the expatriation date, so the exchange rate on that day matters. Moreover, property you own jointly needs your own share worked out with care. In our experience, the pension is the asset most often left out of the first estimate. Because the answer decides whether you are covered, every figure needs a source you can show the IRS if asked.

The five-year certification test

The third test asks whether you certify on Form 8854 that you met all federal tax obligations for the five years before expatriation. If you cannot certify, or do not file, you are a covered expatriate. In our experience, this is the test that catches most people. It applies regardless of income or wealth.

Exceptions for dual nationals and minors

Two exceptions remove the income and net worth tests. The first covers people who were US and another country's citizen from birth, remain taxed as residents there, and were US residents for no more than 10 of the last 15 tax years. The second covers people who expatriate before age 18 and a half, having been US residents for no more than 10 tax years. However, both groups must still pass the certification test.

How is the US exit tax calculated?

The US exit tax treats a covered expatriate as having sold all their property at fair market value on the day before expatriation. Net gains above an exclusion amount are then taxed at ordinary rates for the year. Special rules apply to pensions, deferred compensation and some accounts.

The deemed sale

A deemed sale is a sale the law treats as happening even though nothing is sold. Under section 877A(a), every asset you hold is marked to market on the day before you expatriate. Gains and losses are worked out as if you sold at that value. Therefore, you need a value and a US cost basis for each asset, in dollars, on that date.

The exclusion amount for 2026

The exclusion amount reduces the total net gain from the deemed sale. It is indexed for inflation each year. The IRS gives $890,000 for 2025, and Revenue Procedure 2025-32 sets $910,000 for 2026. As a result, many covered expatriates owe little or no US exit tax on the deemed sale. Gains above the exclusion are taxed as if realised in the year of expatriation.

Deferred compensation and pensions

Deferred compensation follows its own rules. Eligible deferred compensation is paid by a US person who agrees to withhold 30% from each payment, using Form W-8CE. Ineligible deferred compensation is treated as received on the day before expatriation, at its present value. UK pensions raise difficult questions here. Practice differs on how they are treated, so we take a cautious approach and document the reasoning.

IRAs and other tax-deferred accounts

Specified tax-deferred accounts include IRAs, 529 plans, Coverdell accounts and health savings accounts. For a covered expatriate, the whole account is treated as distributed on the day before expatriation. No early withdrawal penalty applies, but the income is taxed. Interests in non-grantor trusts face 30% withholding on later distributions instead.

What do you file, and when?

Everyone who expatriates files Form 8854 with their return for the year of expatriation. That return is usually a dual-status return. Covered expatriates also report the deemed sale and any deferred items.

Form 8854 and its penalty

You attach Form 8854 to your income tax return for the expatriation year, by that return's due date. If you have no return to file, you send the form on its own by the same date. Failing to file, or filing an incomplete or incorrect form, can bring a $10,000 penalty under section 6039G. Furthermore, an unfiled form leaves you a covered expatriate.

Your expatriation date

For a citizen, the expatriation date is generally the date you renounce before a US consular officer, provided a Certificate of Loss of Nationality is later approved. For a green card holder, it is usually the date the card is formally surrendered. Your final US return splits the year at that date. Worldwide income before it is taxed; afterwards, only US-source income is.

Deferring the tax

A covered expatriate can elect to defer the US exit tax on particular assets until they are actually sold, or until death. The election needs adequate security, such as a bond, and a tax deferral agreement with the IRS. Interest runs on the deferred amount. In practice, the election suits people with illiquid assets, such as a family company or property.

Annual filings after expatriation

For most former citizens, Form 8854 is filed once, with the final return. However, covered expatriates with deferred compensation, tax-deferred accounts or deferred tax must file the form every year afterwards. Similarly, anyone who earns US-source income after expatriating, such as US rent or dividends, still has US filing duties as a non-resident. Therefore, leaving the US tax system is often a process that runs for several years.

Does the US exit tax follow you after you leave?

Yes, in two ways. Covered expatriates keep filing Form 8854 each year if they hold deferred items, and US persons who receive gifts or bequests from them can face a separate tax.

The tax on gifts and bequests

Under section 2801, a US citizen or resident who receives a covered gift or bequest from a covered expatriate pays tax at the highest gift or estate rate. Final regulations were published on 14 January 2025, as the Federal Register notice shows. The recipient reports on Form 708. Consequently, renouncing can shift a tax cost onto US family members.

Your UK tax position

Renouncing changes nothing about your UK tax residence, which still turns on the statutory residence test in HMRC's guidance note RDR3. The UK has no equivalent of the deemed sale for giving up US citizenship. However, when you later sell the same assets, UK capital gains tax applies as normal. A US exit tax paid earlier is not automatically credited against that UK charge, so timing matters.

How do you avoid becoming a covered expatriate?

You cannot plan around the net worth or income figures without changing your finances, which is outside what we do. You can, however, make sure the certification test is passed. For many people in Britain, that is the difference between owing nothing and owing the US exit tax.

Get five years compliant first

The certification covers the five tax years before expatriation. If you missed returns or FBARs, you catch up before you renounce. Many people use the streamlined filing compliance procedures for this. However, streamlined covers three years of returns, so the other years may need filing too.

The relief procedures for former citizens

The IRS offers relief procedures for certain former citizens who renounced after 18 March 2010. You need a net worth under $2 million and total tax of $25,000 or less for the expatriation year and the five years before it. Your conduct must also have been non-wilful. If you qualify, you are not treated as a covered expatriate by reason of the certification test.

An illustrative example

Consider a typical case. James is a US citizen who has lived in Bristol for twenty years. He plans to renounce in 2026. His home, savings and investments come to $2.4 million, so he meets the net worth test whatever his filing record. His US income tax has been low because UK tax credits cover most of it.

On the deemed sale, his gains total $1.1 million, mostly on his home. After the 2026 exclusion of $910,000, $190,000 of gain remains taxable. His US exit tax is therefore the tax on that $190,000, in addition to his normal tax for the year. If he also held an IRA, its whole balance would count as distributed. He files Form 8854 with his final dual-status return.

How US UK Tax Experts can help

We prepare the US filings around expatriation for people in the UK. First, we check the three covered expatriate tests against your history and your assets. Next, we prepare any catch-up returns and FBARs through our streamlined filing service. We then prepare the final dual-status return, Form 8854 and the deemed sale figures, from the same records as your UK return.

Our article on how to renounce US citizenship covers the legal steps and the $450 consular fee. We do not give legal advice on nationality, investment advice or financial planning; we prepare and file the returns.

Conclusion

In summary, the US exit tax applies only to covered expatriates. You are covered if your average US tax is above the indexed figure, your net worth is $2 million or more, or you cannot certify five years of compliance. For 2026, the deemed sale gain is reduced by a $910,000 exclusion. Above all, get your filings in order before you renounce, because the certification test is the one you control.

Contact us

Are you planning to renounce and want to know whether the US exit tax applies to you? Email us at hello@usuktaxexperts.com, or tell us about your situation through our contact page. We reply within one working day with the tests that apply and what we would need.