§877A Expatriation Tax — the Cost of Citizenship Renunciation

Who counts as a covered expatriate

The expatriation tax applies only to covered expatriates. Non-covered expatriates renounce citizenship or abandon green card status without §877A liability. Covered-expatriate status is triggered by meeting any of three tests:

Test 1 — Net worth. Net worth of $2,000,000 or more on the expatriation date. This is a bright-line dollar threshold that is not indexed for inflation and has not moved since 2008. Practitioners forecast that this threshold will apply to virtually every high-net-worth US person considering expatriation.

Test 2 — Average tax. Average annual net income tax for the 5 years preceding expatriation exceeds $201,000 (2026, indexed annually). This threshold moves with inflation. For 2025 it was $190,000; for 2024 it was $178,000; the number rises each year.

Test 3 — Non-compliance. Failure to certify under penalties of perjury that all US federal tax obligations for the 5 preceding tax years have been satisfied. This is the compliance-hygiene trap: a taxpayer with net worth well below $2M who has not filed a return in some prior year can still be a covered expatriate.

The mark-to-market exit tax

A covered expatriate is deemed to have sold all worldwide property at fair market value on the day before expatriation. The resulting gain (net of losses) is taxed as if it had been actually realized on that date, with the character of the gain (ordinary, capital, §1231, etc.) following the character of the underlying asset.

The §877A exclusion: $890,000 (2026, inflation-indexed) of net gain is excluded from the deemed sale. The exclusion is a per-taxpayer amount — spouses can each claim the exclusion if both expatriate. Above the exclusion, gain flows through to the taxpayer's US federal return at ordinary or capital rates as applicable.

The IRA and 401(k) rules that most taxpayers don't know

Specified tax-deferred accounts — primarily IRAs, 401(k)s, health savings accounts, and 529 plans — receive special treatment under §877A. Rather than being marked to market and included in the deemed-sale gain, they are treated as distributed on the day before expatriation. The entire account balance is included in the covered expatriate's ordinary income in the year of expatriation, taxed at the marginal rate, with no 10% early distribution penalty.

For a covered expatriate with substantial retirement savings, this is often the largest single line item in the §877A calculation. A $3M Traditional IRA becomes $3M of ordinary income in the expatriation year, potentially taxable at 37% federal plus state, generating over $1M of federal tax liability at expatriation. Roth accounts, by contrast, are already after-tax and generate no additional tax on the deemed distribution.

Green card holders who don't realize §877A applies

Long-term green card holders — permanent residents for 8 of the 15 tax years preceding the year of expatriation — are subject to §877A on the abandonment of permanent resident status just as US citizens are on renunciation. This surprises many green card holders who assume they can simply hand back the green card and walk away.

The 8-of-15-year trap: Even a partial year counts as a year for this test. A green card holder who had permanent resident status for 8 tax years, even if some of those years were only for part of a year, meets the long-term green card holder definition.

The treaty tie-breaker escape: A green card holder who, during their US residency period, was treated as a resident of a treaty partner country under the treaty tie-breaker rules is generally not treated as a long-term resident under §877A. This is an important planning lever for green card holders who spent significant time in a treaty partner country during their US permanent resident years.

What sophisticated expatriation planning actually does

Move 1 — Compliance cleanup first. Before any expatriation planning, ensure 5 years of clean US filings. The compliance-hygiene test (Test 3) is the easiest gate to fail and the easiest to fix in advance. Streamlined Filing Compliance Procedures may be available for taxpayers with historical non-filing gaps.

Move 2 — Pre-expatriation gift and asset transfer. Assets given away before expatriation are removed from the covered-expatriate calculation. The annual gift tax exclusion and the lifetime unified credit remain available. A pre-expatriation gifting program to family members can materially reduce the covered-expatriate calculation, though the gift tax rules require careful application.

Move 3 — Roth conversions. Because Roth accounts are already after-tax, they do not generate ordinary income on the deemed distribution. A pre-expatriation Roth conversion of a Traditional IRA converts the future ordinary-income problem into a current ordinary-income event that may be tax-efficient depending on rate arbitrage.

Move 4 — Realize gains in advance. Assets with substantial built-in gain that will be affected by the deemed sale can be realized in advance at existing rates. This trades acceleration of the tax against the timing benefit of avoiding the §877A regime. Sometimes the answer is to realize; sometimes deferral to expatriation is better; the math is specific to the asset and the taxpayer.

Move 5 — Deferral election for the exit tax. §877A(b) permits a covered expatriate to defer payment of the §877A tax on specific assets until actual disposition, in exchange for interest at the underpayment rate plus a security bond. This is useful for illiquid assets (private company stock, closely-held partnerships, real estate) where a deemed-sale tax would be difficult to pay without actually selling the underlying asset. The deferral election is at the asset level, not the taxpayer level.

Eduardo Saverin, September 2011 — the expatriation that changed the political conversation

Eduardo Saverin was the Brazilian-born Facebook co-founder portrayed in The Social Network — the CFO character Zuckerberg pushes out in a Series A dilution. Saverin later regained a meaningful stake through litigation. He held US citizenship (naturalized), moved to Singapore in 2009, and quietly renounced US citizenship in September 2011 — roughly eight months before Facebook’s May 18, 2012 IPO. The IRS listed his name in its Q1 2012 Quarterly Publication of Individuals Who Have Chosen to Expatriate. The renunciation only became public when a reporter noticed the listing in April 2012, weeks before the IPO. Congress erupted. Senator Schumer proposed the “Ex-PATRIOT Act.” It never passed, but the case became the canonical §877A example every international-tax lecturer walks through.