Covered expatriate tests explained: who pays the US exit tax

What makes someone a covered expatriate?

An expatriate is covered if they meet the tax liability test, the net worth test or the certification test. One is enough. The definition in section 877A of the Internal Revenue Code applies to former citizens and to long-term green card holders alike.

The IRS expatriation tax page (opens the official IRS page in a new tab) sets out the consequence. A covered expatriate is treated as having sold all their worldwide property at fair market value on the day before the expatriation date. Gain from that deemed sale is taxed in the year of expatriation to the extent it exceeds an exclusion, which is $890,000 for 2025 expatriations and is adjusted for inflation each year. A taxpayer may elect to defer payment of the tax on property treated as sold.

For a citizen the expatriation date is the earliest of the date of renunciation before a US consular officer, the date a signed statement of relinquishment is given to the State Department, the date the State Department issues a Certificate of Loss of Nationality, or the date a court cancels a certificate of naturalisation. The first two count only if a certificate confirms them. Our expatriation service fixes that date before any figure is worked out.

How is the net worth test measured?

It compares worldwide net worth on the expatriation date with $2 million. Reaching the figure exactly is enough to be covered. The IRS states this threshold as a flat amount, while the tax liability figure and the exclusion are each given for a particular year of expatriation.

The Instructions for Form 8854 (opens the official IRS page in a new tab) provide a balance sheet in Part II for working out the figure. Assets are valued under the gift tax valuation principles, and a person is treated as owning any property that would be a taxable gift if they transferred it immediately before expatriating. Good-faith estimates are acceptable without formal appraisals. The balance sheet asks for the present value of US and foreign pensions, deferred compensation and beneficial interests in trusts, alongside property, cash and investments, and then for liabilities.

The test looks at a single date, but the form looks further back. It asks whether assets and liabilities changed significantly over the five preceding years. A person whose net worth was at or above the threshold at some point in that period, but below it on the expatriation date, must answer yes and attach a statement explaining the changes. Reducing net worth shortly before expatriating is therefore disclosed.

How does the tax liability test work for UK residents?

It averages US net income tax over the five tax years ending before the expatriation date and compares the average with $206,000, the figure for 2025 expatriations. The amount is adjusted each year, so the threshold for the year of expatriation is the one that applies. For many UK residents this is the easiest test to pass.

The instructions tell the filer to take, for each year, the total tax on the return less any foreign tax credit. For 2024 that means line 24 of Form 1040 less the credit shown on line 1 of Schedule 3. A UK resident whose UK income tax is credited against the US tax on the same income, on Form 1116, will often show a modest US figure even on a substantial salary.

The calculation assumes the returns exist. UK tax reduces the US figure only once the credit is claimed on a filed return, and an unfiled year also fails the certification described next. The US figure can rise where the US taxes income that the UK does not, or taxes it differently.

• Interest, dividends and gains inside an ISA, which the UK leaves untaxed
• Funds that are passive foreign investment companies, taxed under their own US regime
• Net investment income tax at 3.8%, generally not creditable under domestic law, and treaty-based claims are contested
• Gain on a UK home that falls outside the US main home exclusion

Why does failing the Form 8854 certification make you covered?

Because the certification is a test in its own right. Someone who cannot certify, under penalty of perjury, that they met all US federal tax obligations for the five tax years before expatriating is a covered expatriate even if their net worth and tax liability sit well below the other two thresholds.

The compliance question on Form 8854 covers income, employment, gift and information return obligations for those five years, and asks whether all the related tax, interest and penalties have been paid. Information returns are where UK residents most often fall short, such as a missing Form 8621 for a fund held in an ISA.

The form is attached to the income tax return for the year of expatriation and filed by that return's due date, or sent on its own by the same date where no return is required. A separate penalty may be imposed for failing to file it, unless the failure was due to reasonable cause and not wilful neglect.

A worked example: a US citizen working as a hospital consultant in Birmingham moved to England in her twenties and later naturalised as British. Her net worth is below the threshold and her UK tax is credited against her US tax, so her average US liability is low. She filed every year, but two of the last five returns left out the Form 8621 for a fund in her stocks and shares ISA. As things stand she cannot certify, and if she renounced now she would be covered. Filing the missing forms first, with our PFIC reporting service, is what makes the certification true.

Who qualifies for the dual citizen and minor exceptions?

Two groups are excused from the net worth and tax liability tests, though never from the certification. They are people who were dual citizens from birth and remain citizens and tax residents of the other country, and people who relinquish citizenship before the age of eighteen and a half.

The dual citizen must have become a citizen of the United States and of another country at birth, must still be a citizen of that other country on the expatriation date and taxed there as a resident, and must have been a US resident for no more than ten tax years in the fifteen-year period ending with the year of expatriation. The minor must relinquish before reaching eighteen and a half and must have been a US resident for no more than ten tax years before relinquishing.

Residence for these purposes is counted under the substantial presence test (opens the official IRS page in a new tab), the day-count test in Publication 519. Years spent living in the United States, including as a child, can count towards the ten. The second nationality must also have existed at birth. An American who moved to Britain as an adult and naturalised later does not qualify, however long they have lived here. Our post on accidental Americans in the UK explains citizenship at birth.

• Dual citizen exception: a citizen of the United States and another country from birth
• Still a citizen of, and taxed as a resident of, that other country on the expatriation date
• A US resident for no more than ten of the fifteen tax years ending with the expatriation year
• Minor exception: relinquishment before eighteen and a half, with no more than ten resident years
• Neither exception excuses the five-year Form 8854 certification

Do the covered expatriate tests apply to green card holders?

Yes, to long-term residents. A long-term resident is someone who held lawful permanent resident status in at least eight of the last fifteen tax years ending with the year the status ends. Such a person who gives up the card faces the same three tests, and the exceptions written for citizens at birth or minors do not fit their case.

A lawful permanent resident is a US tax resident under the green card test (opens the official IRS page in a new tab) for as long as the status lasts. The instructions add that a year does not count towards the eight if the person was treated as a resident of another country under a tax treaty and did not waive the treaty benefits. The expatriation date is the earliest of voluntary abandonment on Form I-407, a final order of abandonment or removal, or the date the person begins to be treated as a treaty resident of another country without waiving its benefits and notifies the IRS on Forms 8833 and 8854.

Because the status keeps running until it is formally ended, years spent back in the UK count towards the eight. Our post on a green card that expired while living in the UK covers the catch-up, which must be finished before the status is given up.

What should be checked before giving up US status?

All three tests, on the facts as they will stand on the expatriation date, and before the appointment is booked. The usual order is to establish status and dates, bring five years into compliance, value assets and liabilities, and only then expatriate.

Catching up usually runs through the streamlined procedures, which ask for three years of returns and six years of FBARs. The certification looks back five years, so the work is scoped to leave no unfiled year inside that window. Our IRS streamlined filing service handles that stage.

A narrower route exists for those who have already relinquished. The relief procedures for certain former citizens (opens the official IRS page in a new tab) apply to people who relinquished after 18 March 2010, never filed as a US citizen or resident, had net worth below $2 million both at expatriation and at submission, owe total tax for the six years concerned under a low ceiling set by the IRS, and whose failures were non-wilful. A qualifying submission is accepted in place of the certification, so the person is not covered. The full sequence is in our guide to IRS streamlined filing from the UK.

• List any unfiled returns or information returns in the five preceding tax years
• Draw up the balance sheet, including pensions, trusts and liabilities
• Work out US tax less foreign tax credit for each of the five years
• Check the dual citizen or minor exception against the actual dates of residence