The US Exit Tax: Form 8854 & Covered Expatriates

The Final Departure: Understanding the US Exit Tax and Form 8854

In 2025, we saw a surge in “Long-Term Residents” (Green Card holders for 8+ years) planning their permanent move back to India or abroad. The biggest hurdle they face is Internal Revenue Code Section 877A—the “Exit Tax.”

If you are a U.S. citizen or a long-term Green Card holder, the IRS wants one final “settlement” before they let you go. Here is the 2026 guide to expatriation.

1. Are you a “Covered Expatriate”?

The Exit Tax only applies if you are deemed a Covered Expatriate. For 2025 and 2026, you fall into this category if you meet any of these three tests:

• The Net Worth Test: Your worldwide net worth is $2 million or more on the date of expatriation.
• The Tax Liability Test: Your average annual net income tax for the 5 years before leaving exceeds $206,000 (for 2025) or the adjusted 2026 threshold.
• The Compliance Test: You cannot certify on Form 8854 that you have been fully tax-compliant for the last 5 years.

2. The Mark-to-Market Tax: The “Phantom” Sale

If you are a “Covered Expatriate,” the IRS treats you as if you sold every asset you own (globally) on the day before you left. You are taxed on the “unrealized gain” even if you didn’t actually sell anything.

The 2026 Exclusion: The IRS provides a generous exclusion to soften the blow. For 2025, the first $890,000 of gain is excluded; for 2026, this exclusion increases to $910,000.

Example: If you have $1.2 million in unrealized gains on your Indian property and U.S. stocks, you only pay tax on the amount exceeding the exclusion ($1.2M – $910k = $290k taxable gain).

3. The 8-Year Green Card Rule

For non-citizens, the Exit Tax only applies to Long-Term Residents (LTRs). You are an LTR if you have held a Green Card in at least 8 of the last 15 tax years.

• Strategy: If you are approaching your 8th year, leaving in Year 7 can save you from the entire Exit Tax regime.
• The “Sailing Permit”: Before leaving, you must also obtain Form 1040-C (the Departure Permit) to prove you’ve paid all taxes due up to your exit date.

4. Form 8854: Your Final Certification

Filing Form 8854 is the most critical step. Even if you owe $0 in Exit Tax, failing to file this form:

1. Automatically makes you a “Covered Expatriate.”
2. Triggers a $10,000 penalty.
3. Keeps your U.S. tax residency active in the eyes of the IRS.

5. Summary: Your Exit Checklist

1. Valuation: Get a Fair Market Value (FMV) appraisal of your Indian real estate and business interests.
2. Compliance Audit: Ensure your last 5 years of FBARs and 1040s are flawless (use the Streamlined Procedures if they aren’t).
3. Gift Strategy: Consider gifting assets to a spouse or trust before expatriating to drop your net worth below the $2 million mark.

The KKCA Exit Strategy

Expatriation is irreversible once the papers are signed. At KKCA, we provide:

• Pre-Exit Modeling: Calculating your potential tax bill before you renounce.
• Step-Up in Basis Tracking: Ensuring you don’t pay tax on gains that occurred before you ever moved to the U.S.
• Form 8854 Preparation: Managing the complex balance sheet and income statement required for your final filing.

Looking for personalized tax services about your specific tax situation, please contact us. We are here to help you with your specific tax matters.

Disclaimer

This blog is intended for informational purposes only and does not constitute legal or tax advice. Please consult a qualified U.S. CPA or tax attorney for guidance specific to your situation.