Expatriation Tax Explained: Renouncing U.S. Citizenship
Who is a covered expatriate, the deemed sale of everything, the exclusion, and the dual-citizen exception
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
The expatriation tax applies when a U.S. citizen renounces or a long-term green card holder ends residency. A covered expatriate is treated as selling all worldwide property at fair market value the day before expatriating, with gains above an exclusion taxed. Three tests decide coverage — net worth, average tax liability, and five years of certified compliance.
On this page
Who is a covered expatriate
| Test | Threshold (2026) |
|---|---|
| Net worth test | Net worth of US$2 million or more on the expatriation date (not indexed) |
| Tax liability test | Average annual net U.S. income tax for the prior five years of more than US$211,000 for a 2026 expatriation (indexed yearly) |
| Certification test | Failure to certify on Form 8854 compliance with all U.S. tax obligations for the prior five years |
Meeting any one makes the person a covered expatriate. Long-term residents are green card holders for at least eight of the last fifteen years.
The exceptions
A dual citizen from birth who remains a citizen and tax resident of the other country (Canada) and was a U.S. resident for no more than ten of the prior fifteen years, or a person who renounces before age 18½ having been a U.S. resident for no more than ten years, is exempt from the net worth and tax liability tests under section 877A(g)(1)(B) — but must still meet the certification test. The certification test is the one most often failed — fix five years of compliance first.
The exit tax
A covered expatriate is deemed to sell all property at fair market value the day before expatriation; the net gain above an exclusion (US$910,000 for a 2026 expatriation, indexed yearly) is taxed. Deferred compensation, specified tax-deferred accounts, and non-grantor trust interests are carved out: an IRA, HSA, 529, or Coverdell account is treated as fully distributed the day before expatriation (no early-withdrawal penalty); eligible deferred compensation and non-grantor trust distributions bear 30 percent withholding when paid; ineligible deferred compensation is taxed at its present value immediately. An RRSP or RRIF is a foreign retirement arrangement — a deferred compensation item under section 877A(d)(4)(D) — and, with a Canadian payor, ineligible: its value is treated as received the day before expatriation.
After expatriation
Gifts and bequests from a covered expatriate to U.S. persons above the annual exclusion (US$19,000 in 2026) are taxed to the recipients at the top gift and estate rate — 40 percent — under section 2801, reported on Form 708 (final regulations took effect January 14, 2025). Form 8854 is filed with the final U.S. return.
Frequently asked questions
Do I owe exit tax if I renounce U.S. citizenship?
Only if you're a covered expatriate — net worth US$2 million or more, high average U.S. tax, or failure to certify five years of compliance — and only on gains above the exclusion.
Are dual citizens from birth exempt?
From the net worth and tax liability tests, if they meet the conditions — but they must still certify five years of compliance.
What is Form 8854?
The expatriation statement filed with the final U.S. return, certifying compliance and computing any exit tax.
What happens to my RRSP?
For a covered expatriate it's ineligible deferred compensation — a foreign retirement arrangement with a Canadian payor — so its full value is treated as received the day before expatriation and taxed on that year's U.S. return.
Official sources
The IRS explains: “IRC 877A imposes a mark-to-market regime, which generally means that all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date.” — Internal Revenue Service, Expatriation tax, https://www.irs.gov/individuals/international-taxpayers/expatriation-tax
Next step
Fairlight Accounting is a cross-border accounting and tax practice with a U.S. Tax Desk and a Canadian Tax Desk. Our U.S. Tax Desk and Canadian Tax Desk handle expatriation planning — covered expatriate tests, five-year compliance catch-up for the certification test, exit tax computations, Form 8854, and post-expatriation gift planning. See pricing or book a call.
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U.S. and Canadian filings prepared together by our U.S. and Canadian Tax Desks.
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