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The US Exit Tax (IRC Section 877A) imposes a tax on unrealized capital gains when long-term green card holders or citizens renounce their status. In 2026, you're a ‘Covered Expatriate’ if you meet one of three tests; a) Your prior 5 year average annual federal income tax exceeds $211,000, b) Your net worth exceeds $2 million, or c) you fail to certify five years of tax compliance. The exit tax applies to Covered Expatriates and divides one’s estate into five different tax asset classes. Assets are valued according to their fair market value the day before expatriation.
The Heroes Earning Assistance and Relief Tax Act—better known as the HEART Act—fundamentally changed how the United States taxes people who give up citizenship or long-term residency. Before 2008, the old exit tax regime under IRC Section 877 looked at your income for ten years after expatriation known as the ‘"10-year shadow period.” The new system under IRC Section 877A takes a different approach: it taxes you on the way out.
This wasn't an accident. Congress wanted to close perceived loopholes and ensure that wealthy individuals couldn't avoid US taxes simply by renouncing citizenship or abandoning their green cards. The shift from an income-based system to an asset-based system means the tax calculation happens at a single point in time rather than spread over a decade.
The HEART Act applies to two groups: US citizens who formally renounce their citizenship and long-term residents who abandon their green card status. A long-term resident means someone who held lawful permanent resident status for at least 8 of the last 15 tax years regardless of whether they were in the US or not. This counting can get tricky—years don't have to be consecutive, certain treaty positions can interrupt the count, and the year in which the green card was granted counts as the first year regardless of which month it was granted in.
Not everyone who expatriates faces the exit tax. You become a "covered expatriate" if you meet any one of three tests:
1. The Net Worth Test
Your net worth equals or exceeds $2 million on the date of expatriation. This includes everything you own worldwide—real estate, retirement accounts, business interests, investment portfolios, personal property. The IRS wants fair market value, not cost basis. If you own a home in Sydney worth USD $1.5 million equivalent and retirement accounts totaling USD $600,000, you've crossed the threshold.
2. The Tax Liability Test
Your average annual net income tax liability for the five years before expatriation exceeds a specified amount. For 2026, that threshold is $211,000. The IRS adjusts this number annually for inflation. This is actual tax liability after credits and deductions, not gross income. The amount of gross income one would need to meet this test will vary depending on tax filing status and credits and deductions. Alternatively, a taxpayer may have gross income well below this average but have a single year with a large capital gain that pushes them over the five-year average.
3. The Certification Test
You fail to certify under penalty of perjury that you've complied with all US federal tax obligations for the five years preceding expatriation. This means filing returns, paying taxes owed, and meeting information reporting requirements like FBARs and Form 8938. One missed FBAR from three years ago can make you a covered expatriate, regardless of your wealth or income.
There's an important exception: if you were born with dual citizenship, have lived in the other country for most of your life, and haven't been a US resident for tax purposes in recent years, you might avoid covered expatriate status even if you meet one of the tests. The rules here get specific about age, residency history, and the nature of your dual citizenship.
The HEART Act treats covered expatriates as if they sold all their worldwide assets the day before expatriation. This "deemed sale" triggers capital gains on the unrealized appreciation in your assets, whether or not you actually sell anything.
Here's the calculation: You take the fair market value of each asset and subtract its cost basis. The difference is your unrealized gain. Add up all your gains across all assets, apply the built-in gains exclusion ($866,000 for 2026, adjusted annually for inflation), and pay capital gains tax on the remainder.
Some assets get special treatment. Retirement accounts like 401(k)s and IRAs are treated as distributed in full the day before expatriation. You'll pay income tax on the entire balance, with a 30% withholding requirement unless you elect otherwise. Interests in trusts and deferred compensation require separate calculations with their own rules.
The exclusion amount helps, but it only goes so far. If you have $3 million in unrealized gains across your portfolio, the $910,000 exclusion leaves $2.09 million subject to tax. At current long-term capital gains rates, that's a substantial bill coming due based on assets you haven't actually sold.
You have a choice about when to pay the tax on certain assets. Form 8854 allows you to elect to defer tax on specific types of property by posting adequate security and agreeing to file annual information returns. The IRS charges interest on the deferred amount, and the rules about what constitutes adequate security can be demanding. Most people pay the tax immediately rather than deal with the ongoing compliance burden.
Retirement accounts and trusts create their own complications under the exit tax because the IRS categorizes them differently, applying distinct rules to each.
Specified Tax-Deferred Accounts (IRAs) Traditional IRAs hold pre-tax dollars and are classified as "specified tax-deferred accounts." Under the HEART Act, the IRS treats these accounts as if they were completely cashed out and fully distributed to you on the day before your expatriation. This deemed distribution goes on your final U.S. tax return as ordinary income, taxed at ordinary income rates. Fortunately, the IRS waives the standard 10% early withdrawal penalty for this deemed distribution.
Roth IRAs get slightly better treatment. Since you've already paid tax on your contributions, you can withdraw your original contributions tax-free during this deemed distribution. However, if the deemed distribution isn't considered "qualified" (for example, if you are under age 59½), you will still owe ordinary income tax on the account's earnings.
Eligible Deferred Compensation (401(k)s and U.S. Pensions) Unlike IRAs, employer-sponsored plans like 401(k)s are not automatically forced into a deemed distribution on day one. If the plan qualifies as an "eligible deferred compensation item," you are allowed to defer the tax until you actually take withdrawals in retirement. To get this treatment, you must file Form W-8CE with the plan administrator within 30 days of your expatriation and irrevocably waive any right to claim tax treaty benefits that would reduce your withholding. In exchange, the payor will deduct a mandatory flat 30% withholding tax from your future distributions. If you miss the 30-day deadline, the 401(k) becomes "ineligible" and the entire balance is immediately taxed as a lump sum.
Ineligible Deferred Compensation - Other deferred compensation arrangements—like foreign pensions, restricted stock units, and unvested stock options—typically fall into the "ineligible" category. The present value of your accrued benefit in these plans is treated as a lump-sum distribution received on the day before expatriation and taxed immediately as ordinary income.
Interests in Non-Grantor Trusts If you are a beneficiary of a non-grantor trust, expatriation does not trigger an immediate gain as if you sold your interest. Instead, whenever the trust makes a direct or indirect distribution to you in the future, the trustee must deduct and withhold a 30% tax on the taxable portion of that distribution. The trust itself might face additional consequences; for instance, if it distributes appreciated property, the trust must recognize gain as if the property were sold to you at fair market value. Estate planning strategies that worked fine while you were a U.S. taxpayer can create unexpected exit tax exposure.
Let's walk through how this works with actual numbers. Meet Sarah, 60, a longtime green card holder who's moving back to Australia permanently in 2026. She's held her green card for 12 years, so she's a long-term resident for exit tax purposes.
Sarah owns:
Her net worth is $3.55 million, well above the $2 million threshold. She's a covered expatriate.
The mark-to-market calculation:
Total unrealized capital gains: $1.3 million
Less built-in gains exclusion: $910,000
Net capital gain subject to tax: $390,000
At 20% long-term capital gains rate: $78,000 in capital gains tax
The Traditional IRA creates $850,000 of ordinary income
Roth IRA: $200,000 distributed but not taxable (as she’s over age 59.5)
Australian super: $200,000 gain (treated as attributable to a foreign employee benefits trust) - not taxable.
Assuming 35% marginal rate: $297,500 in ordinary income tax
Total exit tax liability: approximately $375,500
This assumes she doesn't have other deductions or planning strategies available. The actual calculation includes nuances around state taxes, and the net investment income tax that could modify the result.
If you're considering expatriation and the exit tax concerns you, several planning strategies might help. The key is timing and thoughtful sequencing of life events.
1. Consider Relinquishing your Permanent Resident Status before Becoming a Long-Term Resident
If you know you'll eventually return home, consider the exit tax implications before you've held a green card for eight years. You can expatriate without triggering covered expatriate status if you're not yet a long-term resident. This requires planning well in advance of any move.
2. Make Gifts Well Before Expatriation
The US gift tax system allows significant tax-free transfers. In 2026, you can gift up to $15 million over your lifetime without owing gift tax. Gifts made before expatriation reduce your net worth, potentially bringing you below the $2 million threshold. However, gifts made to a non-spouse with five years of expatriation receive special scrutiny.
3. Accelerate Income or Realize Losses
If you're close to the $211,000 average tax threshold, strategic timing of income or loss realization over a five-year period might keep your average below the limit. This requires careful tax modeling and assumes you have several years to plan before expatriation.
4. Spend Down Assets
Using assets for personal expenses before expatriation legitimately reduces your net worth. Pay off mortgages, fund children's education, or make charitable contributions. These aren't artificial schemes—they're normal life decisions with beneficial exit tax consequences.
5. Consider Roth Conversions
Converting traditional IRA or 401(k) assets to Roth accounts before expatriation means paying ordinary income tax now at known rates, but avoiding the deemed distribution treatment later. You're accelerating tax but potentially at a lower total cost. This works well for those over 59.5 and have held the Roth for 5+ years as the entire deemed distribution is tax-free.
What doesn't work: Last-minute schemes to hide assets, transfer assets to foreign trusts, or manipulate valuations. The IRS has broad authority to revalue assets, look through structures, and assess penalties for underpayment. Getting caught attempting to evade the exit tax creates far worse problems than paying it.
Every US citizen who renounces citizenship and every long-term resident who abandons permanent residence must file Form 8854, Initial and Annual Expatriation Statement. This form is separate from your final income tax return, though it's due at the same time.
Form 8854 asks detailed questions about your assets, liabilities, income history, and tax compliance. You'll need to list every asset you own worldwide with its fair market value and cost basis. The form requires certification that you've complied with all tax obligations for the five years before expatriation—this is where the certification test gets its teeth.
If you're a covered expatriate, Form 8854 calculates your exit tax liability using the mark-to-market system we've discussed. You'll report your net gain, apply the exclusion, and calculate the tax due. The form also handles elections to defer tax on certain assets.
Failure to file Form 8854 creates serious problems. You remain subject to US tax jurisdiction as if you were still a citizen or resident. Any future US-source income remains taxable, you can't use treaty benefits to reduce that tax, and you face potential penalties for non-compliance. The IRS can assess the failure-to-file penalty for each year you don't submit the form.
The form requires information from the date of expatriation, which means you need to establish values as of that specific date. For traded securities, this is straightforward. For real estate, business interests, or unusual assets, you might need professional appraisals. The IRS can challenge your valuations, so documentation matters.
Once you've paid the exit tax and filed Form 8854, your US tax obligations don't necessarily end immediately. You're still responsible for tax compliance on any remaining US-source income, though you're now taxed as a nonresident alien.
US-source income for nonresident aliens includes, but is not limited to:
The tax treatment of each income type follows nonresident alien rules, which differ significantly from citizen or resident taxation. Tax treaties between the US and your new country of residence might reduce or eliminate some of these taxes.
If you're a covered expatriate, special rules apply to future gifts or bequests you make to US tax residents. The transferor pays a special transfer tax equal to the highest gift or estate tax rate (currently 40%) on covered gifts or bequests to you. This creates complications for US family members who want to transfer wealth to you after expatriation.
You also face restrictions on future time spent in the United States. Covered expatriates who spend too many days in the US in future years might be treated as US residents for tax purposes again. The rules here interact with the substantial presence test and treaty tie-breaker provisions in complex ways.
Can I avoid covered expatriate status by gifting assets to family members right before I expatriate?
Gifts within five years of expatriation to US persons receive special scrutiny and might not reduce your net worth for exit tax purposes if the IRS determines they were made with expatriation in mind. However, legitimate gifts made well before expatriation as part of normal estate planning generally count. The key is timing and documentation of non-tax motives.
How does the exit tax interact with Australian tax on capital gains?
Australia doesn't recognize the US exit tax as a real disposition event since you haven't actually sold your assets. This can create double taxation if you later sell assets and Australia taxes the full gain from original acquisition. Tax planning requires coordination between both countries' rules, and in some cases you might be able to step up your basis in Australia to reflect the US exit tax paid.
What if my assets are difficult to value on my expatriation date?
You're required to use fair market value as of the day before expatriation. For illiquid assets like business interests, closely held real estate, or restricted stock, you'll likely need professional appraisals. The IRS can challenge your valuations, so documentation and supportable methodologies matter. Err on the side of reasonable conservatism rather than aggressive discounting.
The exit tax represents one of the most significant financial considerations when planning to leave the US tax system. Between the $2 million net worth threshold, the mark-to-market taxation system, and the special treatment of retirement accounts and trusts, the rules create substantial complexity for anyone with meaningful assets.
The calculation isn't just about current tax rates and thresholds—it's about understanding how your entire financial picture gets treated at that single moment of expatriation. This means thinking through every asset class you own, how it's taxed under normal rules versus exit tax rules, and what planning opportunities exist if you have time before your move.
For many Australians who spent years in the United States building wealth, returning home means confronting these rules head-on. The same applies to Americans considering a permanent move to Australia. The tax doesn't make the move impossible, but it requires planning, modeling, and often some difficult decisions about timing.
If you're facing an expatriation decision and the exit tax applies to your situation, working through the specifics with advisors who understand both US exit tax rules and your destination country's tax system can help you make informed choices. The rules allow for planning, but the planning needs to start well before your actual move date.
Schedule a conversation to explore how the exit tax applies to your specific situation and what strategies might make sense given your timeline and goals.
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