Will you be a covered expatriate?

Most people who model the US exit tax model the wrong test. They calculate their net worth, compare it to USD 2,000,000, and stop. The test that catches them is the third one, it has nothing to do with wealth, and by the time it applies there is no way to fix it.

Under IRC §877A there are three limbs. Failing any one makes you a covered expatriate.

The net worth test is now a middle-class threshold

USD 2,000,000 is statutory, and it has not moved since 2008. Nothing indexes it. Inflation has done the work instead: a paid-off house in a major city, a pension and a brokerage account will clear it without the owner ever having considered themselves wealthy.

For the readers of this note the test is not a question. Assume you are over it and model from there.

The income tax test is about tax, not income

Average annual net income tax for the five years ending before the expatriation date must exceed USD 211,000 for 2026, up from USD 206,000 for 2025. The figure is set annually by revenue procedure — Rev. Proc. 2025-32 §4.37 for 2026 — so expect it to move again for 2027.

Note the base. This is not a USD 211,000 income test. It is the tax. A five-year average of USD 211,000 in federal income tax implies a materially larger income, and it is why some wealthy people with heavily sheltered or loss-offset positions fail the net worth test comfortably and pass this one.

The certification test is the sleeper

The third limb has no threshold. You must certify on Form 8854, under penalty of perjury, that you have complied with all US federal tax obligations for the five tax years preceding expatriation. Fail to certify and you are covered — regardless of your wealth, regardless of the tax you have paid.

A person worth USD 400,000 with unfiled FBARs, a missed Form 5471 or an unreported foreign trust becomes a covered expatriate on this limb alone. It is the most common route to covered status for the merely disorganised, and it is the only one of the three that is entirely within your control before you act.

You cannot certify retroactively. Clean the compliance up before expatriating. After the fact, the door is shut.

What covered status costs

The deemed sale

You are treated as having sold all of your worldwide assets at fair market value the day before expatriation. Gain is recognised; tax is due.

Against that, the mark-to-market exclusion is USD 910,000 for 2026, up from USD 890,000 for 2025 (Rev. Proc. 2025-32 §4.38, under §877A(a)(3)). Two points about it are routinely misunderstood:

• It applies to your net gain across all mark-to-market assets in aggregate, not asset by asset. USD 1.2m of gains against USD 400,000 of losses is USD 800,000 net, entirely inside the exclusion.
• It is indexed. It will be a different number in 2027.

What is not marked to market

§877A(c) carves three categories out of the deemed sale and handles them by withholding instead:

• Eligible deferred compensation — 30% withholding on taxable payments. Form W-8CE notifies the payor.
• Specified tax deferred accounts — treated as fully distributed on the day before expatriation.
• Interests in non-grantor trusts of which you were a beneficiary the day before expatriation — 30% on the taxable portion of distributions to a covered expatriate, with the trust recognising gain as if it had sold the distributed property at fair market value.

This is not relief. It is a different, and frequently worse, mechanism.

Form 8854 is the whole apparatus

One form carries the certification, the balance sheet and the deemed-sale computation. It is due when the income tax return for the year of expatriation is due. Failing to file it when required carries a USD 10,000 penalty — which is the small part. The large part is that not filing means you have not certified, and not certifying makes you covered.

The dual-national-from-birth exception is narrower than it sounds

Both conditions must be met, and the second defeats most claimants:

1. You became at birth a citizen of the US and of another country, and you continue, as at the expatriation date, to be a citizen of and taxed as a resident of that other country; and
2. You were a US resident for not more than 10 of the 15 tax years ending with the year of expatriation.

The failure point is "taxed as a resident of that other country". Holding a second passport from birth is not enough. A dual US/Irish citizen from birth living in Dubai does not qualify: they are a citizen of Ireland, but they are not taxed as a resident of it. A parallel exception exists for certain minors who expatriate before age 18½.

The green card trap: eight of fifteen

You are a long-term resident if you were a lawful permanent resident in at least 8 of the last 15 tax years ending with the year residency ends. At that point, abandoning the green card on Form I-407 is an expatriating act subject to §877A on exactly the same terms as a citizen renouncing — including the unindexed USD 2,000,000 net worth test that a decade of US real estate appreciation will quietly satisfy.

Two details do the damage:

• Partial years count as full years. Someone who arrived in November 2018 was an LPR in 2018. The clock is a year further along than the calendar suggests.
• The treaty tie-breaker is a tool before year eight and a trap after it. A year in which you are treated as a foreign resident under a treaty, and do not waive treaty benefits, does not count toward the eight. The same election made after becoming a long-term resident is itself an act of expatriation, triggering §877A, with no way back.

§2801: the charge that outlives the exit

This is the number most often missing from exit-tax models, and it is frequently the largest one in the exercise.

Under IRC §2801, a US person who receives a covered gift or bequest from a covered expatriate pays tax at the highest estate and gift rate — 40% — on the value above the annual exclusion (USD 19,000 for 2025 and 2026). The recipient pays it, on Form 708, due the fifteenth day of the eighteenth month after the close of the calendar year of receipt. Final regulations were published on 14 January 2025 and apply to covered gifts and bequests received on or after 1 January 2025.

There is no expiry. A covered expatriate's US-resident grandchildren are exposed decades later, on money they had no part in earning and no say in structuring. If your children intend to remain American, this charge, and not the deemed sale, is the exit tax.

What we do not know, and what could move

• The USD 2,000,000 net worth threshold is statutory. Only Congress moves it, and Congress has not moved it in eighteen years. Do not model an increase.
• The USD 211,000 and USD 910,000 figures are indexed and reset annually by revenue procedure. The 2027 numbers do not exist yet.
• Valuation of illiquid and private assets on a single date — a private company, a fund carry, a property portfolio — is where the disputes live, and an aggressive valuation is where the penalties live. There is no published safe harbour.
• The renunciation fee is USD 2,350, appointments are scarce, and the act is irreversible.

Order of operations

1. Establish whether you are already over the USD 2,000,000 threshold. You probably are.
2. Audit five years of compliance — FBARs, 8938, 5471, 3520/3520-A, 8621 — and remediate before any expatriating act.
3. Model §2801 against your actual beneficiaries, not only the deemed sale against your balance sheet.
4. If you hold a green card, count your LPR years first, including partial ones, before anyone mentions a treaty election.
5. Only then discuss where you are going. For a US person, the destination is the second question.