Exit tax when giving up US citizenship or a green card

Who can face the US exit tax?

The exit tax rules apply to a US citizen who gives up citizenship or a long-term resident who ceases to be treated as a lawful permanent resident for US tax purposes, including through a qualifying treaty-residence claim. Owing tax is a second question: the person must also be a covered expatriate. Giving up a green card held for fewer than eight qualifying tax years does not, by itself, enter the section 877A exit tax system. A noncitizen with fewer qualifying years generally does not file Form 8854 solely for surrendering the card, but may still need a departure-year income tax return. Earlier departures can fall under different rules (IRS: Form 8854 instructions; IRS: Publication 519).

Moving abroad does not itself end US citizenship or green card status. A green card's printed expiration date also does not establish that permanent residence ended; the IRS residency rules turn on surrender or formal revocation, with a separate treaty route.

Am I a long-term resident if I held a green card for eight of fifteen years?

You are a long-term resident if you held lawful permanent resident status in at least eight of the fifteen tax years ending with the year that status ends. A year can count even if you held the card for only part of it; count tax years, not anniversaries or days. Do not count a year in which you were treated as resident of another country under a tax treaty and did not waive its benefits (IRS: Form 8854 instructions).

Start with the year the green card was issued, then mark each year through the end date. Record any treaty-resident year and the return that disclosed the claim. A card that expired or sat unused can still represent lawful permanent resident status until the relevant legal ending event (Internal Revenue Code section 7701(b)(6)).

Which date counts when I surrender a green card or renounce citizenship?

For a long-term resident, the first qualifying event controls: DHS-confirmed abandonment after Form I-407, a final abandonment order, a removal order followed by actual departure, or a treaty-residence claim with IRS notice. The newer IRS overview adds conditions to the I-407 and removal-order dates that the current Form 8854 instructions omit, so verify the event and date before filing. A move or an expired card alone is not that date (IRS: Publication 6164; IRS: Form 8854 instructions).

For citizenship, the date can be the consular renunciation date or another qualifying relinquishment date, provided the State Department later issues a certificate of loss of nationality. The certificate's issue date or a court's cancellation of naturalization can also be the relevant date under the statute (Internal Revenue Code section 877A(g)(4)).

A green card holder claiming residence in another treaty country must actually qualify under that treaty, keep its benefits, and notify the IRS. Dual residents generally disclose that position on Form 8833; the claim can itself end long-term residence for exit tax purposes before Form I-407 is filed (IRS: Form 8854 instructions; IRS: Form 8833).

Your expatriation date does not by itself decide whether the departure-year income tax return is full-year resident or dual-status. Income-tax residence has separate ending rules; see First year as a US tax resident for return mechanics (IRS: Publication 519).

Am I a covered expatriate?

A citizen or long-term resident is a covered expatriate if any one of the following tests applies on departure. The average-tax test uses tax liability, not income or the balance due on a return (IRS: Form 8854 instructions; 2026 inflation adjustments).

Net worth is the value of assets worldwide less liabilities. Count private-company or partnership interests, pensions, foreign assets, and any includible trust interests. Form 8854 allows good-faith value estimates; formal appraisals are not required (IRS: Form 8854 instructions).

Someone who became both a US citizen and another country's citizen at birth can escape the first two tests if they remain a citizen and tax resident of that other country and were a US resident for no more than ten tax years in the fifteen-year period ending with departure. For this exception, count US residence under the substantial presence test. Certain people expatriating before age 18½ have a similar exception. Neither exception removes the five-year certification or Form 8854 requirement (IRS: Form 8854 instructions).

How is exit tax calculated, and how much gain is exempt?

A covered expatriate generally computes gain and loss as if most property worldwide were sold at fair market value the day before expatriation. Allowed losses can offset gains; up to $910,000 of otherwise includible deemed gain is excluded for this tax year, subject to any prior use of the lifetime exclusion. That amount is an exclusion from gain, not a tax credit or a flat tax rate (Internal Revenue Code section 877A(a); 2026 inflation adjustments; IRS: Notice 2009-85).

An unsold rental property or private-company share can have a deemed gain even though you keep it.

The exclusion is allocated among assets with built-in gains. The remaining gain keeps the character relevant to its tax calculation; losses follow the usual limits, apart from the wash-sale rule specified in section 877A. Deferred compensation, specified tax-deferred accounts, and interests in nongrantor trusts have separate rules rather than the deemed-sale treatment. A later real sale needs a basis adjustment for gain or loss already taken into account, even if some deemed gain was excluded (IRS: Form 8854 instructions; IRS: Notice 2009-85).

If the US taxes a deemed sale while you are resident in Canada, Article XIII(7) of the Canada–US treaty may allow an election for Canada to treat the asset as sold and repurchased at fair market value. The election and each country's timing need review before a Canadian basis is recorded.

Does a green card holder's cost start at the value on arrival?

Basis is the US tax cost used to measure gain. For this exit-tax calculation, property you owned when you first became a US tax resident generally has a basis no lower than its fair market value on that date. This can reduce deemed gain; it is not a general reset of basis for every future US tax purpose. A covered expatriate may elect out for an asset on Form 8854, but the election is irrevocable (Internal Revenue Code section 877A(h)(2); IRS: Form 8854 instructions).

The IRS notice says US real property interests and property used in a US trade or business generally do not receive this arrival-value rule, subject to a treaty-related business-property exception. Keep the purchase records, the first US residency date, and evidence of the property's value on that date. For Canadian tax basis when you move north, see Moving from the US to Canada.

What happens to a 401(k), IRA or pension?

Retirement accounts do not all follow the deemed-sale rule. A covered expatriate must identify the account type and whether a pension payor can meet the eligible deferred compensation rules (Internal Revenue Code section 877A(c)–(e); IRS: Publication 6164).

Deferred compensation is eligible only if the payor is a US person or a foreign payor electing US-person treatment, and you notify the payor on Form W-8CE and waive treaty withholding relief for each item in a statement attached to Form 8854. A 401(k) label alone does not decide its treatment (IRS: Form 8854 instructions).

Deferred compensation attributable to services performed outside the US while you were neither a US citizen nor resident is excepted from these deferred compensation rules (Internal Revenue Code section 877A(d)(5)).

Give Form W-8CE to each payor of deferred compensation, each specified account, and each nongrantor trust interest by the earlier of the day before its first distribution on or after expatriation or 30 days after expatriation. Eligible deferred compensation also requires an irrevocable waiver of treaty withholding relief (IRS: Form W-8CE; IRS: Form 8854 instructions). Later taxation of a US retirement account in Canada is covered in US retirement accounts in Canada.

What must I file, and when?

Citizens and long-term residents who expatriate file Form 8854 even if they do not meet a covered expatriate test. Complete Parts I and II, attach the form to the US income tax return for the departure year, and send the original to the IRS address in the form instructions. If no income tax return is required, send Form 8854 by the date that return would have been due, including extensions (IRS: Form 8854 instructions; IRS: Form 8854).

The IRS can assess a $10,000 penalty for a required Form 8854 that is missing, incomplete, or incorrect, unless the failure was due to reasonable cause and not willful neglect (IRS: Form 8854 instructions). Gather your green card and citizenship dates, treaty claims, five years of returns and payment records, a departure-date balance sheet, asset purchase and arrival-date values, and retirement plan statements. For the return mechanics, see First year as a US tax resident; the same guide handles dual-status filing.

Can I defer paying the exit tax?

A covered expatriate can elect to defer payment of the deemed-sale tax for individual assets. The election does not erase the tax or its interest. It is irrevocable and requires a tax deferral agreement, adequate security, a US person appointed as a limited agent for IRS communications, and a waiver of treaty rights that would block collection. Elect in Form 8854 Part II, Section D, with the two hypothetical returns required by its instructions. Send the agreement request with the original form by the applicable return due date; attach a copy to the Form 8854 filed with your return. Check the current instructions for the mailing address (Internal Revenue Code section 877A(b); IRS: Form 8854 instructions; IRS: Form 8854).

Payment generally is due by the unextended return due date for the year the asset is disposed of, and no later than the return due date for the year of death; failed security can accelerate it. Interest runs from the original tax due date. Compare the cost of security and interest with paying now before making this election (IRS: Notice 2009-85).

What if I missed returns in the five years before leaving?

Missing required returns or unpaid federal tax can prevent the five-year certification and make an expatriate covered even below both financial thresholds. Review income, employment, gift, and information-return obligations before signing Form 8854 (IRS: Form 8854 instructions).

If you never filed as a citizen, see Catching up on missed US returns for the former-citizen relief procedures. If you missed FBARs or foreign-asset forms, see Catching up on missed foreign reporting. Correcting years and certifying them may require separate judgments about the filing route and timing.

What changes for gifts or bequests to family in the US?

A US citizen or resident who receives a covered gift or bequest from a covered expatriate can owe a separate section 2801 tax. For this tax, residence means domicile, which can differ from income-tax residence. The giver is not treated as covered while subject to US gift or estate tax as a US citizen or resident. The recipient, rather than the expatriate, generally reports and pays the tax on Form 708 when the year's aggregate covered receipts exceed $19,000. The current rate on the excess is 40% (IRS: Form 708 instructions).

The final Form 708 instructions are available. The usual filing date is the fifteenth day of the eighteenth month after the calendar year of receipt, with special dates for some bequests and trusts. Transfers already subject to US gift or estate tax and certain spouse or charity transfers have different treatment. A foreign trust can elect to pay this tax instead of its US distributees on timely Form 708, Part I, line 13b; its trustee signs Part VIII. With no covered receipt in the election year, the form is due by the fifteenth day of the sixth month after that year (IRS: Form 708 instructions; IRS: Form 708). A living giver who has or may have expatriated and does not authorize IRS disclosure of their status is treated as covered for section 2801 unless the recipient can document otherwise. Record the recipient, date, value, and your covered status before making a transfer.

Example

Illustrative amounts are in US dollars. A green card holder ends status after eight qualifying tax years. Their net worth on that date is $2.2 million, so they are covered under the net-worth test even if their average income tax is lower than the separate test.

Suppose assets subject to the deemed-sale rule have $1 million of built-in gain, no allowable losses, and no prior use of the gain exclusion. The $910,000 exclusion leaves $90,000 potentially taxable under the applicable income-tax rules. No asset was actually sold, and the calculation does not include a separately treated IRA or pension. The person still files Form 8854 and the departure-year return.

Different for you?

• You are moving to Canada: coordinate the US departure date and Canadian arrival rules in Moving from the US to Canada.
• You will remain a US citizen in Canada: the annual filing position differs; see Americans living in Canada.
• You have a pension, trust, large unrealized gains, or may be covered: valuation, payor notices, and elections need cross-border tax review.
• You cannot certify five years of filings: first review Catching up on missed US returns and missed foreign reporting.
• You plan gifts or bequests to US family: section 2801 can shift tax to recipients; get cross-border tax review before transferring property.