How it works
Section 877A treats a covered expatriate’s worldwide property as sold at fair market value the day before renouncing citizenship or ending long-term residency, and taxes the net gain above an inflation-adjusted exclusion. You are a covered expatriate if your net worth is 2 million dollars or more, your average income tax liability over five years exceeds an inflation-adjusted threshold, or you cannot certify five years of tax compliance on Form 8854. Deferred compensation and tax-deferred accounts have separate rules.
Why it matters
Failing the compliance certification makes you a covered expatriate regardless of wealth. Catching up on filings before renouncing, and planning around the net worth test, can avoid the tax entirely.
Example
A long-term green card holder with 1.5 million dollars in assets and five clean years of returns gives up residency. He is not a covered expatriate and owes no exit tax. Had he skipped two years of filings, he would be, and his unrealized gains would be taxed.
Related: Form 8854, Section 877A. Read more: Form 8854 guide.
