Expatriation, exit tax and gifts from covered expatriates

A U.S. citizen scenario

Consider a U.S. citizen who is a beneficiary of a nongrantor trust and is examining the federal tax consequences of relinquishing citizenship. The analysis begins with whether the individual becomes a covered expatriate and whether the trust interest exists on the day before expatriation. Those questions connect the individual's status to the special trust provisions of section 877A.^[1][2]

A gift made before expatriation and a bequest received after expatriation are different events. The earlier gift belongs in the analysis of transfers made while the donor remains a U.S. citizen; the later bequest raises a separate question about receipt from a covered expatriate. Neither transaction is the same event as holding a trust interest immediately before expatriation. Section 2801 concerns covered transfers to recipients, while section 877A addresses the expatriate's tax responsibilities.^[2][3]

Expatriation dates and long-term residence status

Section 877A applies to citizens who relinquish citizenship and long-term residents who terminate residency on or after 17 June 2008. Earlier expatriations remain subject to the rules applicable to their dates. Moving abroad is distinct from the statutory events that establish an expatriation date.^[4]

A long-term resident is a noncitizen who holds lawful permanent resident status in at least 8 taxable years during the 15-tax-year period ending with the termination year. A year does not count if the individual is treated as resident in a foreign country under an income tax treaty and does not waive the relevant treaty benefits. This definition connects immigration status with a specific federal tax measurement period.^[5]

Citizenship relinquishment dates depend on specified acts and, for certain acts, subsequent confirmation through a certificate of loss of nationality. For a long-term resident, treaty residence treatment can terminate lawful permanent resident treatment for tax purposes when the individual retains the relevant treaty benefits and notifies the IRS. Immigration documents, physical location and federal tax residence therefore answer different questions.^[1][4]

Federal U.S. treatment: covered expatriate status

Covered expatriate status follows from any of three tests, subject to limited exceptions. For expatriation in 2025, the average annual net income tax liability test is more than $206,000 for the five preceding tax years. For expatriation in 2026, that threshold is more than $211,000. This test measures net income tax liability, not gross income or the value of property.^[6]

For expatriations in 2025 and 2026, the net worth test is $2 million or more on the expatriation date. The separate certification test applies when the individual fails to certify on Form 8854 compliance with all federal tax obligations for the five preceding tax years. An individual below both financial thresholds can therefore become covered through failure to satisfy the certification requirement.^[6]

Certain dual citizens and certain minors qualify for exceptions to the financial tests, but the certification requirement remains. The dual citizen exception requires citizenship in both countries at birth, continuing citizenship and tax residence in the other country, and no more than 10 years of U.S. residence during the relevant 15-tax-year period. The minor exception requires expatriation before age 18½ and no more than 10 tax years of U.S. residence before expatriation. The specified residence measurements use the substantial presence test.^[1]

The deemed sale and its practical effect

The mark-to-market rule generally treats a covered expatriate's property as sold for fair market value on the day before expatriation. A taxable gain can therefore arise without an actual sale or cash proceeds. Gain enters the tax year of the deemed sale; losses remain subject to otherwise applicable limitations, except that the wash sale rules do not apply.^[4]

For calendar year 2025, the amount otherwise included in gross income under the deemed sale rule is reduced, but not below zero, by $890,000. This is a reduction of the deemed sale income calculation, not an exclusion measured by the total value of property. Later realized gain or loss is adjusted for gain or loss already taken into account, without regard to that exclusion amount. For taxable years beginning in 2026, the reduction is $910,000.^[4][11]

A property-specific election can defer payment of the attributable tax. The statute requires adequate security and an irrevocable waiver of treaty rights that would prevent assessment or collection. Deferral also has statutory endpoints, including the return payment date for the year of death. It changes payment timing and carries continuing conditions.^[2]

Deferred compensation and specified accounts

Deferred compensation calls for a separate classification analysis. For an eligible deferred compensation item, section 877A requires the payer to withhold 30 percent of a taxable payment to a covered expatriate. The taxable payment is measured by the amount that enters gross income if the recipient continues to be taxed as a U.S. citizen or resident.^[2]

The statute separately identifies specified tax deferred accounts. These include individual retirement plans with stated statutory exceptions, qualified tuition programs, qualified ABLE programs, Coverdell education savings accounts, health savings accounts and Archer MSAs. The distinction between an account and eligible deferred compensation matters because the eligible compensation withholding rule does not cover every category.^[2]

A covered expatriate holding deferred compensation, a specified tax deferred account or a nongrantor trust interest immediately before expatriation files Form W-8CE with each payer. The filing date is the earlier of the day before the first distribution on or after expatriation or 30 days after expatriation. The form notifies the payer of covered status and the applicable special rules.^[7]

Trust interests and continuing expatriation reporting

For section 877A, a nongrantor trust means the portion of a trust that the individual is not treated as owning under the grantor trust provisions. That determination occurs immediately before expatriation. The special nongrantor trust subsection applies only if the covered expatriate is a beneficiary on the day before expatriation, making the governing instrument and beneficiary status directly relevant.^[2]

Form 8854 serves both the compliance certification and initial and annual information reporting functions. The 2025 instructions require an initial filing for individuals relinquishing citizenship or terminating long-term residency in 2025. They also require annual filings for earlier expatriates with deferred tax payments, eligible deferred compensation or beneficiary interests in nongrantor trusts. Reporting can therefore continue after the initial expatriation filing.^[1]

Gifts and bequests received from covered expatriates

Section 2801 places the tax on the recipient of a covered gift or bequest. Its final regulations are effective 14 January 2025, and Form 708 reports covered receipts and calculates the tax. For this provision, residence follows the gift and estate tax concept of domicile, which differs from income tax residence.^[6][8]

For calendar years 2025 and 2026, the section 2801 annual amount is $19,000. The calculation applies a 40 percent rate to net covered gifts and bequests after subtracting the annual amount from the year's aggregate covered receipts. Foreign gift or estate tax paid with respect to the covered transfer reduces the section 2801 tax.^[6][8]

Fair market value at receipt determines the value of each covered transfer. Certain transfers qualifying for the specified charitable or marital deductions fall outside the statutory definition. A recipient's records consequently need to connect the transfer, its receipt date, its value and the transferor's covered status; the transfer's description as a family gift does not resolve those legal elements.^[3][8]

Foreign trusts receiving covered transfers

A non-electing foreign trust does not pay section 2801 tax merely upon receiving a covered gift or bequest. A U.S. citizen or resident beneficiary becomes subject to the tax upon receiving a distribution attributable to that covered transfer. The attribution rule reaches distributions from income or principal, so the trust's receipt history matters alongside its current distribution records.^[3][8]

A foreign trust can elect on Form 708 to be treated as a domestic trust solely for section 2801 purposes. An electing foreign trust reports covered receipts and calculates the resulting tax at the trust level. The election's limited purpose does not establish domestic trust classification for every other federal tax provision.^[3][6]

Form 708 timing and the separate Form 3520 inquiry

The general Form 708 deadline is the 15th day of the 18th month following the close of the receipt calendar year. Special timing rules apply to certain bequests, migrated foreign trusts and foreign trust elections, so the general deadline does not settle every filing date.^[6]

A timely Form 7004 grants an automatic six-month filing extension without extending payment time. Form 3520 also addresses covered expatriate gifts and bequests: its instructions identify possible Form 708 obligations for direct receipts and attributable foreign trust distributions. Form 3520 and Form 708 involve separate reporting inquiries.^[6][9][10]

Questions and answers

Related pages

• Second citizenship and U.S. tax obligations: Understand how second citizenship affects a U.S. citizen's worldwide income reporting, foreign accounts, earned income exclusions and expatriation tax duties.
• Form 3520: foreign trusts and foreign gifts: Form 3520 reports U.S. persons' dealings with foreign trusts and certain foreign gifts: reporting categories, definitions, attachments and filing timing.
• Foreign gifts and trust distributions: Form 3520 reports foreign trust distributions and certain gifts from foreign persons. Reporting does not by itself determine whether a receipt is taxable.
• When a Foreign Trust Has a U.S. Beneficiary: When a U.S. person transfers property to a foreign trust, the rules for deciding whether the trust has a U.S. beneficiary look at more than the named beneficiaries. Rules also address trust terms, loans, property use, and transfer reporting.
• Foreign grantor trusts after the grantor dies: A grantor's death generally ends grantor status for a foreign trust, which changes how income, distributions and U.S. reporting work for U.S. citizens.