In an era of increasing global mobility and tax policy uncertainty, some high-net-worth individuals consider renouncing their U.S. citizenship or abandoning their long-term permanent resident status as a tax planning strategy. The tax consequences of expatriation are governed by Section 877A of the Internal Revenue Code, which imposes a mark-to-market exit tax on "covered expatriates"—a regime designed to ensure that unrealized gains do not escape U.S. taxation when a taxpayer leaves the U.S. tax system.

Who Is a Covered Expatriate?

Not every person who renounces citizenship or abandons a green card is subject to the exit tax. The exit tax applies only to "covered expatriates," defined as individuals who meet any one of three tests: an average annual net income tax liability exceeding a threshold amount (adjusted for inflation) for the five tax years preceding expatriation, a net worth of $2 million or more on the date of expatriation, or a failure to certify compliance with all federal tax obligations for the five preceding years.^[1]

Long-term residents—green card holders who have held their status for at least 8 of the 15 tax years preceding the year of abandonment—are also subject to the covered expatriate rules if they meet any of the three tests.

The Mark-to-Market Exit Tax

The exit tax operates by treating the covered expatriate as having sold all worldwide assets at fair market value on the day before the expatriation date. The resulting gains are subject to tax, with an exclusion amount that is adjusted annually for inflation. Gains above the exclusion are taxed at the applicable capital gains rates. Losses can offset gains, but any net loss cannot be used after expatriation.^[2]

Certain types of property receive special treatment. Interests in tax-deferred accounts (IRAs, 401(k) plans) are treated as if the entire balance were distributed on the day before expatriation, with the distribution subject to ordinary income tax (but not the 10% early distribution penalty). Interests in specified tax-deferred accounts are taxed at 30% when actual distributions are made.

The Gift and Inheritance Tax on Former Citizens

Even after expatriation, covered expatriates face an ongoing tax consequence: gifts and bequests from a covered expatriate to a U.S. person are subject to a special transfer tax equal to the highest estate and gift tax rate (currently 40%) paid by the U.S. recipient. This provision ensures that covered expatriates cannot simply wait until after expatriation to transfer wealth to U.S. family members tax-free.^[3]

Planning Considerations

Expatriation is an irrevocable decision with profound legal, tax, and personal consequences. Before considering expatriation, individuals should obtain a comprehensive tax analysis of the exit tax consequences based on their specific asset portfolio and unrealized gains, evaluate the impact on estate planning for U.S. family members, consider the non-tax consequences including loss of U.S. visa-free travel and the right to reside in the United States, and understand the ongoing reporting obligations that may continue after expatriation.^[4]

The complexity of the expatriation tax rules requires coordination between tax counsel, immigration counsel, and financial advisors. The decision should never be made based solely on tax considerations, and the tax savings must be weighed against the substantial costs and permanent consequences of leaving the U.S. tax system.^[5]