Covered Expatriate Status and the Section 877A Exit Tax

The issue

Section 877A taxes the act of leaving the US tax system. When a citizen gives up citizenship, or a long-term resident gives up lawful permanent residence, one classification decides the outcome: whether the individual is a covered expatriate. Only a covered expatriate owes the exit tax, and the same status later governs the taxation of gifts and bequests to US recipients. Because the status is fixed on the expatriation date, the steps that can change it must be completed before then.

Who the guide is for

It addresses estate planners, tax advisors and attorneys advising citizens who renounce and green card holders who surrender their status, and fiduciaries and family advisors abroad whose clients or relatives are leaving. It assumes the typical case in the firm’s practice: a move to a country with an income tax treaty, and often an estate tax treaty, with the United States.

The expatriation date and the three tests

For a citizen, the tax date is generally the date of the renunciation oath or of the signed statement of voluntary relinquishment, provided the Department of State later issues a certificate of loss of nationality (I.R.C. § 877A(g)(4)). For a long-term resident it is the day the status ends, and a claim of treaty residence abroad on Form 1040-NR with Form 8833 ends it from the first day of treaty residence (I.R.C. § 7701(b)(6)). The USD 2,000,000 net worth line, unchanged since 2004, is applied to each spouse separately. The exceptions for certain dual citizens from birth and for minors are open to citizens only and never excuse certification, so the compliance cure comes first.

The deemed sale and the separate regimes

The deemed sale covers everything that would be in the gross estate, including grantor trust assets, valued under estate tax principles; the 3.8 percent net investment income tax applies, and the basis rises by the entire deemed gain. Property owned when US residence began receives a basis no lower than its value at that time, a rule that also covers naturalized citizens (I.R.C. § 877A(h)(2)). Deferred compensation from a US payor, after notice on Form W-8CE and a treaty waiver, bears 30 percent withholding on later payments; foreign pensions, for which no election procedure exists, are included at present value. IRAs other than SEP and SIMPLE plans, 529, Coverdell and ABLE accounts, HSAs and Archer MSAs are treated as distributed, nongrantor trust distributions bear 30 percent withholding, and tax on the deemed sale may be deferred against security and interest (I.R.C. § 877A(b)).

Treaties, the country of destination and section 2801

The guide maps the income tax treaties with twelve countries, whose pension and other income articles set the cost of the mandatory waivers, and the estate and gift tax treaties that apply to a former citizen’s estate. It then compares how those countries receive the deemed sale. Canada, Austria and Belgium give assets a new acquisition cost when residence begins; the Netherlands and Luxembourg limit that treatment to substantial shareholdings; Germany ties the cost of holdings of at least one percent to the value used in an assessed US tax, but not above the value at arrival, and Article 13(6) of the income tax treaty with Germany offers an election where the deemed sale results from the end of US residence; France, the United Kingdom, Italy, Spain and Ireland retain the original cost. Section 2801 follows, under the 2025 final regulations.

The questions the guide answers

• When does a citizen or green card holder become an expatriate, and on what date?
• Which test makes the individual a covered expatriate, and can certification still be achieved?
• What is included in the deemed sale, at what value, and with what basis?
• How are US and foreign pensions, IRAs, other tax-deferred accounts and trust interests treated?
• When is the deferral election worth making, and what does it require?
• What must be filed for the exit year and afterward, including Form 8854 and Form W-8CE?
• Will the country of destination give effect to the deemed sale and the stepped-up basis?
• How does section 2801 tax later gifts and bequests to US family members?

The firm advises on expatriation within a broader mandate: the compliance review and certification, the valuation and basis records, the routing of pensions and trust interests, the choice of the expatriation date and the later filings. Its lawyers hold German as well as American law degrees. For other destinations the firm works with the client’s advisors there or with advisors from its network, so that both sides of the move are planned together.