Covered Expatriate
A U.S. citizen who renounces citizenship, or a long-term permanent resident who abandons their green card, and who meets one or more of three tests under IRC Section 877A — net income tax liability, net worth, or five-year tax compliance certification.
The Three Tests
Covered expatriate status is triggered by meeting any single one of three independent tests. You do not need to meet all three. Meeting one is sufficient.
Net income tax liability test: Your average annual net income tax liability for the five years preceding the year of expatriation exceeds a threshold indexed annually by the IRS. For 2025, this threshold is $206,000. If your average annual U.S. tax bill over the prior five years exceeded this amount, you are a covered expatriate on this test alone.
Net worth test: Your net worth on the date of expatriation is $2 million or more. This threshold has not been indexed since it was established — it is not adjusted for inflation. It captures an increasingly broad population over time.
Five-year compliance certification: You cannot certify that you have been in compliance with all U.S. federal tax obligations for the five years preceding expatriation. This includes income tax returns, FBAR filings, FATCA obligations, and any other applicable federal tax requirements.
The Consequence: Mark-to-Market Exit Tax
IRC 877A treats covered expatriates as having sold all worldwide assets at fair market value on the day before expatriation. The unrealized gain above an annual exclusion amount (indexed; approximately $877,000 for 2025) is recognized and taxed as ordinary income or capital gain in the year of expatriation — whether or not any assets are actually sold.
The exit tax applies to virtually all property: U.S. and foreign real estate, investment accounts, business interests, deferred compensation, and certain retirement accounts. Specific rules apply to deferred compensation items and interests in non-grantor trusts.
Why the Sequencing Matters
The most consequential and most commonly overlooked interaction in sovereign planning involves the sequence of citizenship acquisition, tax residency elections, and asset restructuring relative to a potential covered expatriate determination. A client who acquires a second citizenship, then elects a foreign flat tax regime, then encounters the exit tax at renunciation — having made each individual decision correctly — may face a liability that none of their advisors independently modeled. The exit tax analysis must precede the residency and citizenship decisions, not follow them.
See how this concept applies within the planning disciplines and frameworks we use in client engagements.
See in Context →Understanding the concept is the first step. Applying it to your specific jurisdictional architecture is what the diagnostic delivers.
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