Am I a Covered Expatriate? How the US Exit Tax and the Covered-Expatriate Tests Actually Work

If you are a US citizen or a long-term green-card holder thinking about renouncing or surrendering status, often as part of a move to a territorial-tax country like Panama, the question that keeps coming up is blunt: am I a covered expatriate, and will the US charge me an exit tax on the way out? This article walks through who counts as an expatriate, the three tests that turn an ordinary expatriate into a covered one, how the section 877A mark-to-market exit tax works, the special rules for retirement accounts and trusts, and the one filing that ties it all together, Form 8854. Every figure below is current for 2026 and traced to the statute or IRS guidance.

First, the relief that the headlines usually miss: most people who expatriate are not covered expatriates, and even covered expatriates do not always owe tax. The point of getting this right is to know which group you are in before you act, because the test is applied on the day you expatriate and cannot be re-run later.

Who is an expatriate, and who is a long-term resident

An expatriate, for these rules, is one of two people: a US citizen who relinquishes citizenship, or a long-term resident of the United States who ceases to be a lawful permanent resident [IRC §877A(g)(2)]. Your expatriation date is the date you relinquish citizenship or, for a long-term resident, the date you cease to be a lawful permanent resident [IRC §877A(g)(3)].

The second category is the one green-card holders miss. A long-term resident (often shortened to LTR) is a non-citizen who was a lawful permanent resident, a green-card holder, in at least 8 of the last 15 taxable years ending with the year of the expatriating event [IRC §877(e)(2); IRC §877A(g)(5)]. The count is by taxable year, not by full calendar years of physical presence, so even a partial year in which you held the green card generally counts as one of the eight. This is why the audience shorthand is the "8-of-15-year rule."

Two wrinkles matter here. First, a year does not count as a green-card year if, for that year, you were treated as a resident of another country under a tax treaty and you did not waive the treaty benefits [IRC §877(e)(2)]. Second, claiming that treaty-resident position can itself be the expatriating event: under [IRC §7701(b)(6)], a long-term resident who starts being treated as a treaty resident of another country, does not waive the treaty, and notifies the IRS, is treated as ceasing to be a lawful permanent resident, which is an expatriation.

The three covered-expatriate tests

Being an expatriate is not the same as being a covered expatriate. You become a covered expatriate only if you meet at least one of three tests, drawn from the long-standing section 877 rules and applied through section 877A [IRC §877A(g)(1)(A); IRC §877(a)(2)]. Meet any one and you are covered; the exit tax and the special rules then apply.

1. The net-worth test

You are covered if your net worth is $2,000,000 or more on your expatriation date [IRC §877(a)(2)(B)]. Net worth means the fair market value of everything you own, worldwide, minus your liabilities. This figure is fixed in the statute and is not adjusted for inflation, so the $2 million line is the same in 2026 as it was when the rule was written; only the income-tax figure below moves each year.

2. The average-annual-net-income-tax test

You are covered if your average annual net income tax for the five taxable years ending before your expatriation date is more than an inflation-adjusted threshold [IRC §877(a)(2)(A)]. For an expatriation in 2026, that threshold is $211,000 [Rev. Proc. 2025-32, §4.37]. Note what this measures: it is your tax, the net income tax shown on your returns (as defined in section 38(c)(1)), averaged over five years, not your income and not your net worth. The figure is indexed annually, so the year of expatriation controls which number applies.

Recent thresholds, from the annual IRS inflation Revenue Procedures:

• 2023: $190,000 [Rev. Proc. 2022-38]
• 2024: $201,000 [Rev. Proc. 2023-34, §2.37]
• 2025: $206,000 [Rev. Proc. 2024-40, §2.37]
• 2026: $211,000 [Rev. Proc. 2025-32, §4.37]

Source: IRS annual inflation-adjustment Revenue Procedures, "Expatriation to Avoid Tax" heading, Code section 877.

3. The compliance-certification test

You are covered if you fail to certify, under penalty of perjury, that you have complied with all US federal tax obligations for the five taxable years preceding expatriation, or fail to submit the evidence the IRS requires [IRC §877(a)(2)(C)]. You make this certification on Form 8854, and it covers filing your returns (income, employment, gift, and information returns) and paying the tax, interest, and penalties due [Form 8854 Instructions (Rev. 2025)].

This third test is the trap for the otherwise-modest expatriate. A person well under both the $2 million and the $211,000 lines is still a covered expatriate if they cannot truthfully certify five clean years, for example because of unfiled FBARs or a missed information return. The first two tests are about size; this one is about being current.

Two exceptions that can keep you out of covered status

Even if you meet the net-worth or income-tax test, two narrow categories of person are not treated as meeting those tests, so they are not covered on that basis [IRC §877A(g)(1)(B)]:

Certain dual citizens at birth: you became, at birth, a citizen of both the US and another country, you still are a citizen of and taxed as a resident of that other country as of your expatriation date, and you were a US resident (under the substantial-presence test) for not more than 10 of the last 15 taxable years [IRC §877A(g)(1)(B)(i)].

Certain minors: you relinquished US citizenship before age 18 and a half, and you were a US resident for not more than 10 taxable years before that date [IRC §877A(g)(1)(B)(ii)].

These exceptions do not switch off the third test. To use them you must still file Form 8854 and certify five years of tax compliance; fail that, and you are covered anyway [IRC §877(a)(2)(C); Form 8854 Instructions (Rev. 2025)].

The section 877A exit tax: a deemed sale of everything you own

If you are a covered expatriate, the central charge is the mark-to-market tax, the "exit tax." On the day before your expatriation date, all of your property worldwide is treated as sold for its fair market value [IRC §877A(a)(1)]. The resulting gain (or loss) is taken into account on that deemed sale for that taxable year; the wash-sale rule does not block a loss [IRC §877A(a)(2)]. There is no actual sale and no buyer; the tax falls on unrealized gain, as if you had cashed out the morning before you left.

Crucially, not all of the gain is taxed. The net gain that would otherwise be included is reduced, but not below zero, by an exclusion amount that is indexed for inflation [IRC §877A(a)(3)]. For a deemed sale in 2026, the exclusion amount is $910,000 [Rev. Proc. 2025-32, §4.38]. So a covered expatriate whose total net built-in gain is below the exclusion amount may owe no mark-to-market tax at all, even though the deemed sale technically happens.

Recent exclusion amounts:

• 2024: $866,000 [Rev. Proc. 2023-34, §2.38]
• 2025: $890,000 [Rev. Proc. 2024-40, §2.38]
• 2026: $910,000 [Rev. Proc. 2025-32, §4.38]

Source: IRS annual inflation-adjustment Revenue Procedures, "Tax Responsibilities of Expatriation" heading, Code section 877A; base exclusion $600,000 indexed from 2008 [IRC §877A(a)(3); Notice 2009-85].

Three categories of asset are carved out of this deemed sale and handled under their own rules instead: deferred compensation items, specified tax-deferred accounts, and interests in non-grantor trusts [IRC §877A(c)]. Those are covered in the next section. The operative IRS guidance for the whole section 877A regime is Notice 2009-85, which applies to anyone who expatriates on or after June 17, 2008 [Notice 2009-85].

The deferral election: paying later, with security and interest

Because the exit tax can fall on gains you have not actually realized, the statute lets you elect to defer paying the mark-to-market tax, property by property, until you actually dispose of the asset [IRC §877A(b)(1)]. The election is attractive in theory (no forced sale to pay tax on a phantom sale) but it comes with real conditions:

You must provide adequate security, such as a bond meeting section 6325 or another form the IRS accepts, for each property covered [IRC §877A(b)(4)].

You must make an irrevocable waiver of any treaty right that would prevent the US from assessing or collecting the tax [IRC §877A(b)(5)].

The election is irrevocable and applies only to the property identified in it [IRC §877A(b)(6)].

Interest accrues on the deferred tax; for interest purposes the due date is figured without regard to the deferral, so deferring is not free [IRC §877A(b)(7)].

Deferral also cannot run past the due date of the return for the year of your death [IRC §877A(b)(3)].

Special rules: deferred comp, retirement accounts, and non-grantor trusts

The three carve-outs from the deemed sale are not exemptions; they are different mechanisms, and some of them tax you immediately while others tax you as money comes out later.

Deferred compensation items

These split into two buckets [IRC §877A(d)]. An eligible deferred compensation item (broadly, where the payor is a US person, or a foreign payor that elects US-payor treatment, and you notify the payor of your covered status and irrevocably waive any treaty withholding reduction) is not taxed at expatriation; instead, the payor withholds 30% of each taxable payment when it is actually paid to you [IRC §877A(d)(1), (d)(3)]. An ineligible deferred compensation item is treated as if you received the present value of your entire accrued benefit on the day before expatriation, with no early-distribution penalty for that deemed receipt [IRC §877A(d)(2)]. "Deferred compensation item" is defined broadly and includes many foreign pensions and retirement arrangements [IRC §877A(d)(4)].

Specified tax-deferred accounts

For accounts such as IRAs, 529 plans, ABLE accounts, Coverdell education savings accounts, health savings accounts, and Archer MSAs, you are treated as receiving a full distribution of your entire interest on the day before expatriation, and no early-distribution penalty applies to that deemed distribution [IRC §877A(e)(1), (e)(2)]. In plain terms, your IRA is treated as fully cashed out the day before you leave, and the taxable portion is taxed then.

Interests in non-grantor trusts

Your interest in a non-grantor trust is not part of the deemed sale. Instead, when the trust later makes a distribution to you as a covered expatriate, the trustee withholds 30% of the taxable portion of that distribution, and the trust recognizes gain on appreciated property it distributes as if it had sold the property to you at fair market value [IRC §877A(f)(1)]. A non-grantor trust is, broadly, the portion of a trust you are not treated as owning under the grantor-trust rules, tested immediately before expatriation [IRC §877A(f)(3)].

Form 8854: the filing that ties it all together

Form 8854, the Initial and Annual Expatriation Statement, is where expatriation is reported to the IRS [Form 8854 Instructions (Rev. 2025)]. It is the document on which you make the five-year compliance certification, report your balance sheet and net worth (which drives the net-worth test), and compute the section 877A mark-to-market tax if you are a covered expatriate. You file an initial Form 8854 for the year you expatriate, and annual Forms 8854 in later years if you deferred tax, hold an eligible deferred-compensation item, or are a beneficiary of a non-grantor trust [Form 8854 Instructions (Rev. 2025)].

The form is filed under the information-return regime for expatriates [IRC §6039G]. Filing it correctly is not optional: if you are subject to section 877A and fail to file, file late, or file with missing or incorrect information, the penalty is $10,000 for that year, unless the failure is due to reasonable cause and not willful neglect [IRC §6039G(c); Form 8854 Instructions (Rev. 2025)]. And remember the link back to the third test: failing to file Form 8854 and certify can, by itself, make you a covered expatriate.

The Panama relocation context: moving is not expatriating

This is the single most important point for anyone reading this while planning a move to Panama: relocating to Panama is not expatriating, and it does not trigger the exit tax. The exit tax is triggered by the legal event of renouncing US citizenship or surrendering long-term-resident status, not by where you live [IRC §877A(g)(2), (g)(3)]. A US citizen can move to Panama City, obtain residency, and live there for years while remaining a US citizen and a US taxpayer on worldwide income. Nothing about that move is an expatriation.

Expatriation is a separate, deliberate, legal step: a citizen formally renouncing before a US consular officer (with a resulting Certificate of Loss of Nationality), or a long-term resident formally abandoning the green card or taking a treaty-resident position that ends lawful-permanent-resident status [IRC §877A(g)(2); IRC §7701(b)(6)]. People often conflate the two because they happen in the same season of life. They are not the same event, and only the second one starts the section 877A clock.

For a long-term green-card holder relocating to Panama, the interaction is worth flagging: Panama has no comprehensive US income-tax treaty, so the treaty tie-breaker route to ending residency that is available in some other countries is not available the same way here.

A worked example (hypothetical)

Suppose Maria is a US citizen who has lived in Panama City since 2018 and decides to renounce her US citizenship in 2026. All figures here are illustrative. On her expatriation date her net worth is $4.5 million, comfortably over the $2 million line, so she meets the net-worth test and is a covered expatriate [IRC §877(a)(2)(B)]. She does not need to also fail the income-tax test; meeting any one test is enough.

Her assets include a brokerage account with $1.6 million of built-in gain, a residential property in Panama with $300,000 of built-in gain, and a traditional IRA worth $500,000. On the day before she expatriates, her brokerage and home are treated as sold at fair market value [IRC §877A(a)(1)], producing $1.9 million of net built-in gain. She reduces that by the 2026 exclusion amount of $910,000 [Rev. Proc. 2025-32, §4.38], leaving roughly $990,000 of gain subject to the mark-to-market tax (taxed under the normal capital-gain rules that would have applied). Her IRA is handled separately: she is treated as receiving a full distribution of the $500,000 on the day before expatriation, taxed as ordinary income, with no early-distribution penalty [IRC §877A(e)(1)].

If paying tax on the deemed sale would force Maria to liquidate, she can consider the deferral election for specific assets, posting security and waiving treaty collection rights, while interest accrues until she actually sells [IRC §877A(b)]. She files Form 8854 for 2026, certifies five years of compliance, and reports the computation [Form 8854 Instructions (Rev. 2025)].

Where to go from here

If you are weighing renunciation or surrendering a green card, the covered-expatriate question is worth settling before you act, while the facts can still be arranged. A short review can tell you which of the three tests you meet, whether an exception applies, and what the exit tax would actually cost. We are happy to walk through your situation.

This article is general information, not tax or legal advice. Your facts decide your outcome, that's what a review is for.

FAQ

Does moving to Panama trigger the US exit tax?

No. The exit tax is triggered by renouncing US citizenship or surrendering long-term-resident status, not by changing where you live [IRC §877A(g)(2), (g)(3)]. You can be a US tax resident living full-time in Panama. The exit tax only enters the picture when, and if, you formally expatriate.

Am I a covered expatriate if my net worth is under $2 million?

Not on the net-worth test alone, but you can still be covered. You are a covered expatriate if you meet any one of the three tests, so a person under $2 million is still covered if their five-year average income tax exceeds the threshold ($211,000 for 2026) or if they cannot certify five years of tax compliance [IRC §877(a)(2); Rev. Proc. 2025-32].

Does every covered expatriate actually owe exit tax?

No. The mark-to-market gain is reduced by an inflation-adjusted exclusion amount, $910,000 for 2026, before any tax applies [IRC §877A(a)(3); Rev. Proc. 2025-32, §4.38]. A covered expatriate whose total net built-in gain is below that amount may owe no mark-to-market tax, though retirement accounts and deferred compensation are taxed under their own separate rules.

What happens to my IRA or 401(k) when I expatriate?

It depends on the account type. A specified tax-deferred account such as an IRA is treated as fully distributed to you the day before expatriation, taxed then, with no early-distribution penalty [IRC §877A(e)]. Many employer plans are deferred-compensation items, where an eligible item is instead subject to 30% withholding as amounts are paid out [IRC §877A(d)].

What is Form 8854 and what happens if I skip it?

Form 8854 is the expatriation statement where you certify five years of tax compliance and report the exit-tax computation [Form 8854 Instructions (Rev. 2025)]. Failing to file it when required carries a $10,000 penalty absent reasonable cause, and failing to certify can itself make you a covered expatriate [IRC §6039G(c); IRC §877(a)(2)(C)].