--- oa_review_kit: v1 guide_slug: us-expatriation-exit-tax guide_version: us-expatriation-exit-tax@2026-05-31T18:20:08.568Z archetype: personal_income --- # Review kit: US Expatriation Exit Tax Thank you for reviewing this Guide. This kit is one file with three parts: how to use it, an interview prompt for your AI, and the Guide itself. ## How to use this kit (3 steps, about 15 minutes) 1. Open the AI you already use (ChatGPT, Claude, Gemini, anything that reads markdown) and paste in everything from "INTERVIEW PROMPT" below, including the Guide at the end. 2. Your AI interviews you like a colleague, one question at a time. Just talk: war stories, walk-throughs, the mistakes you catch. No writing required. 3. Your AI writes your answers up as a single markdown file. Hand it back at openaccountants.com/skills/us-expatriation-exit-tax/handback (also linked from the Guide page: "Hand back your file"). What you added is published under your name and credential. If your AI cannot produce the exact output format, hand back whatever you have: a revised Guide file, a worksheet, or plain notes. We take those too, and a person reviews them by hand. The format below is the one we can apply straight away. --- # INTERVIEW PROMPT (paste from here down into your AI) You are interviewing a practising accountant about how they actually do the work covered by the attached Guide ("US Expatriation Exit Tax", slug `us-expatriation-exit-tax`). Interview them like a colleague doing a handover. Do not lecture. Ask ONE question at a time and wait for the answer. Chase war stories and specifics: what kind of client, which portal step, how big the penalty was. The rates, thresholds, and citations are our job; we refresh those from primary sources. Capture ONLY what is NOT derivable from law: - order of operations, and what a wrong order corrupts - what to ask a client before computing anything - what to assume when a fact is unknown, and how it gets flagged - the most-missed traps, with penalty size and who falls in - how the portal or filing channel actually behaves - what has to reconcile before anyone signs - when to refuse the work and hand it to a human specialist If the accountant corrects a rate, threshold, or deadline in the Guide along the way, record it in the FACT CORRECTIONS table, but do not steer the interview toward numbers. ## Questions to work through Ask these in order, one at a time. Skip any the accountant has already covered; follow up where a story has specifics worth pinning down. Each question is tagged with the method slot(s) it feeds. 1. [intake_questions] A new personal-tax client sits down. What are your first five questions before you touch a number? 2. [intake_questions] [conservative_default] Which of those answers, if missing, makes you stop rather than estimate? 3. [evidence] Which documents do you insist on seeing, and which do you take the client's word for? 4. [sequence] In what order do you build the return, and what goes wrong when someone does it backwards? 5. [trap] What deduction or relief do clients most often believe they're entitled to but aren't? 6. [trap] What computation does software or AI most often get wrong on returns you've reviewed? 7. [judgment_rule] When the law gives two routes (regime choice, standard vs itemized, allowance vs actuals), how do you actually pick, and what do you write down about the choice? 8. [cross_check] What triggers the tax authority's mismatch letters in your experience, and what do you reconcile up front to prevent them? 9. [edge_case] Tell me about a client whose side income (platform, rental, foreign) changed the whole shape of the return. What did you do differently? 10. [filing_mechanics] Walk me through the e-filing itself: the verification step, the deadline nobody knows, what happens if the client doesn't do their part. 11. [scope_gate] What kind of personal-tax client do you turn away or send to a specialist? 12. [handback_protocol] What exactly do you hand the client before anything is filed? What's in your working paper? ## Method slots (for tagging the write-up) - `scope_gate` (Scope gate and refusals): when to stop and send the client to a human - `sequence` (Order of operations): what order to do things in, and what a wrong order corrupts - `intake_questions` (Client intake questions): what to ask a client before computing - `evidence` (Documents and evidence): which documents to insist on, and what is draft-grade vs file-grade - `judgment_rule` (Judgment rules): how a practitioner actually picks when the law allows two routes - `conservative_default` (Conservative defaults): what to assume when a fact is unknowable at draft time - `trap` (Traps and most-missed items): the mistakes everyone makes, what they cost, and who falls in - `filing_mechanics` (Portal and filing mechanics): how submission actually works: channel, order, what locks - `cross_check` (Cross-checks before signing): what has to reconcile with what before delivery, and how close is close enough - `pattern_library` (Pattern library): how messy real-world data (bank lines, payout platforms) maps to tax categories - `edge_case` (Edge-case playbook): the client situations that change the method, not just the numbers - `unsettled_law` (Unsettled-law flags): what not to finalise right now, and why - `handback_protocol` (Hand-back protocol): what the finished working paper contains and who reviews it ## Output format: oa-handback v1 When the interview is done, write the answers up as ONE markdown file in exactly this shape. Fill in the reviewer's real name, credential, and email (ask for them at the end if they have not come up). Every method block gets a `### [method:]` heading where `` is one of the 13 slot ids above. Keep `guide_slug` and `guide_version` exactly as given. Omit any section the interview produced nothing for, but keep the headings that remain exactly as shown. The `fact_key` column may be left blank when unknown. ```markdown --- oa_handback: v1 guide_slug: us-expatriation-exit-tax guide_version: us-expatriation-exit-tax@2026-05-31T18:20:08.568Z reviewer_name: reviewer_credential: # free text: CPA, EA, ACCA, Steuerberater... reviewer_email: verdict: --- ## METHOD ### [method:filing_mechanics] ### [method:intake_questions] - - ... ## FACT CORRECTIONS | fact_key | current | correct | source | |---|---|---|---| | | | | | ## FLAGS - [unsettled] - [refer] ## NOTES ``` If for any reason you cannot produce this exact format, output the accountant's corrections and methods as clear plain notes instead. The hand-back page accepts plain notes and revised Guide files too; this format is an optimization, never a gate. --- # THE GUIDE UNDER REVIEW --- name: us-expatriation-exit-tax description: "US expatriation tax for citizens renouncing and long-term green-card holders abandoning status: the covered-expatriate tests (IRC §877A/§877), the mark-to-market exit tax, the special rules for deferred compensation, tax-deferred accounts and non-grantor trust interests, the dual-citizen and minor exceptions, Form 8854, and the §2801 tax on US recipients of gifts from covered expatriates. Produces a working paper and a reviewer brief — not a filed return. MUST load alongside cross-border-tax-workflow-base." jurisdiction: US domain: income-tax tax_year: 2025 --- # us-expatriation-exit-tax ## What this file is This is a topic content skill that **loads on top of `cross-border-tax-workflow-base`** and assumes the **`cross-border-tax-router`** has already run its Step 0 residency map and routed the situation here. It carries the substantive US rules for two populations who sever the US tax net: 1. a **US citizen who renounces** citizenship, and 2. a **long-term resident (LTR)** — a lawful permanent resident (green-card holder) for at least **8 of the prior 15 tax years** under **§877(e)(2)** — who **abandons** that status or is treated as a resident of a treaty country. It produces a working paper and reviewer brief; it never produces a filed return, and no human has signed off on its output until `request_accountant_review` returns a credentialed sign-off. **Sequencing — fix the exit-tax test and date FIRST.** Per the `cross-border-tax-router` sequencing rule, the **covered-expatriate determination and the expatriation date must be fixed before any post-expatriation disposal is planned**. Expatriation triggers a **deemed sale of all worldwide property** the day before the expatriation date (§877A(a)), which **resets basis** and changes the timing of every later transaction. Planning a disposal before pinning the date produces wrong basis and wrong gain. Do the test and the date, then plan. **Currency.** The **net-worth $2,000,000 test threshold is fixed by statute** and not indexed. Two figures **are** inflation-indexed and change every year — the **average-annual-net-income-tax threshold** and the **net-gain exclusion amount** for the mark-to-market tax. This file never hardcodes a current figure as authoritative; it instructs the agent to **confirm the current-year value** from the Form 8854 instructions / the relevant Rev. Proc. inflation-adjustment release before computing. ## Layer A — Reference layer (the rules) ### A.1 — Who is an "expatriate" (IRC §877A(g)(2), §877(e)) - **Expatriate** — An expatriate is (a) a US citizen who relinquishes citizenship, or (b) an LTR who ceases to be a lawful permanent resident. The expatriation regime of §877A only bites where the expatriate is also a covered expatriate. Non-LTR green-card holders and ordinary non-resident aliens are out of scope. _(IRC §877A(g)(2), §877(e))_ ### A.2 — Covered-expatriate decision tree (IRC §877A(g)(1), §877(a)(2)) - **Covered-expatriate tests — any one triggers covered status** — An expatriate is a covered expatriate if they meet ANY ONE of the three independent tests below (subject to the limited exceptions in A.4): 1) Net-worth test — §877(a)(2)(B): Worldwide net worth is ≥ $2,000,000 on the expatriation date. This threshold is fixed (not indexed). Net worth is computed on a fair-market-value balance-sheet basis. 2) Net-income-tax test — §877(a)(2)(A): The average annual net US income tax for the 5 tax years ending before the expatriation date exceeds an inflation-indexed threshold. Confirm the current-year figure from the Form 8854 instructions before applying it — it has been in roughly the $190k–$200k range in recent years, but treat any number here as confirm current year, not authoritative. 3) Certification test — §877(a)(2)(C): The expatriate fails to certify, on Form 8854, under penalties of perjury, full compliance with all US federal tax obligations for the 5 tax years preceding expatriation (and to attach evidence of compliance if requested). Failure to certify makes the person a covered expatriate regardless of net worth or income. Meeting any one test ⇒ covered. The three are tested independently; a person under the net-worth and income thresholds is still covered if they cannot certify on Form 8854. _(IRC §877A(g)(1), §877(a)(2))_ - **Net-worth test threshold** — 2000000 USD (fixed, not indexed) _(§877(a)(2)(B))_ - **Average annual net US income tax threshold (5-year test)** — inflation-indexed; roughly $190k–$200k in recent years — confirm current-year figure from Form 8854 instructions USD (confirm current year) _(§877(a)(2)(A))_ ### A.3 — Mark-to-market "exit tax" mechanics (IRC §877A(a), (b)) - **Deemed sale on expatriation** — A covered expatriate is treated as having sold all property they own (with limited exceptions for the special-regime assets in A.5) at fair market value on the day before the expatriation date (§877A(a)(1)). _(IRC §877A(a)(1))_ - **Net gain recognition and exclusion** — Net gain from the deemed sale is recognized; net gain above an inflation-indexed exclusion amount is taxed (§877A(a)(3)). Confirm the current-year exclusion from the Form 8854 instructions / Rev. Proc. — it has been above ~$800k in recent years; treat as confirm current year. The exclusion amount is allocated pro rata across the assets with built-in gain. _(IRC §877A(a)(3))_ - **Net-gain exclusion amount** — inflation-indexed; above ~$800k in recent years — confirm current year USD (confirm current year) _(§877A(a)(3))_ - **Losses and wash-sale rules** — Losses are taken into account (and wash-sale rules under §1091 apply), but the exclusion only shelters net gain, not loss. _(IRC §1091)_ - **Deferral election** — An irrevocable election to defer the mark-to-market tax on a per-asset basis is available under §877A(b) — but it requires adequate security (e.g. a bond), a waiver of treaty rights to the assessment, and interest accrues until paid. Note it; do not assume it. _(IRC §877A(b))_ ### A.4 — Exceptions to covered status (IRC §877A(g)(1)(B)) - **Two exceptions to covered status** — Two exceptions can keep an expatriate out of covered status even if they breach the net-worth or income test — but BOTH still require filing Form 8854 and certifying 5 years of compliance (the certification test is never waived): 1) Dual-citizen-at-birth exception — §877A(g)(1)(B)(i): The person (a) became a US citizen and a citizen of another country at birth and, as of the expatriation date, continues to be a citizen of, and taxed as a resident of, that other country, AND (b) was a US resident for not more than 10 of the 15 tax years ending with the expatriation year. 2) Minor-expatriate exception — §877A(g)(1)(B)(ii): The person relinquished US citizenship before age 18½ and was a US resident for not more than 10 tax years before relinquishment. If an exception applies, the person can still certify on Form 8854 and avoid covered status; if they cannot certify, the certification test makes them covered regardless of the exception. _(IRC §877A(g)(1)(B))_ ### A.5 — Special asset regimes (IRC §877A(c)–(f)) - **Eligible deferred compensation** — If the payer is a US person (or a non-US payer that elects to be treated as one) and the covered expatriate irrevocably waives treaty withholding-reduction rights, the item is "eligible": it is not marked to market; instead 30% withholding applies to future taxable payments. _(IRC §877A(d)(1))_ - **Ineligible deferred compensation** — Where the eligibility conditions are not met, the covered expatriate is treated as receiving a deemed lump-sum distribution of the present value of the accrued benefit on the day before expatriation — taxed up front. _(IRC §877A(d)(2))_ - **Specified tax-deferred accounts** — IRAs, §529 plans, Coverdell ESAs, health/medical savings accounts, etc. are treated as receiving a deemed full distribution of the entire account on the day before expatriation (income tax applies; the 10% early-distribution additional tax does not). _(IRC §877A(e))_ - **Interests in non-grantor trusts** — A covered expatriate's beneficial interest in a non-grantor trust is not marked to market. Instead, the trustee withholds 30% of the taxable portion of each direct or indirect distribution to the covered expatriate. Cross-reference `us-foreign-trust-reporting` for the trust classification (grantor vs non-grantor) and the reporting that surrounds it. _(IRC §877A(f))_ - **Withholding rate on eligible deferred comp / non-grantor trust distributions** — 30 % _(IRC §877A(d)(1), §877A(f))_ ### A.6 — §2801 transfer tax on US recipients (high level) - **§2801 transfer tax on US recipients** — Separate from the exit tax, IRC §2801 imposes a transfer tax on the US citizen or resident recipient of a "covered gift or bequest" received from a covered expatriate — at the highest gift/estate-tax rate, on amounts above the annual exclusion. This is a distinct transfer-tax regime that follows the covered expatriate indefinitely and burdens the recipient, not the expatriate. Flag it at a high level when a covered-expatriate determination is positive; do not compute it in this file. _(IRC §2801)_ ## Layer B — Executable layer (the procedure) Work the steps in order. Do not plan disposals before Step 4 is fixed. ## B.1 — Confirm status and dates. - **B.1 — Confirm status and dates** — Determine whether the person is a renouncing citizen or an LTR (8-of-15-years test, §877(e)(2)). Fix the expatriation date (date of the consular renunciation / CLN, or the date LPR status was abandoned or treaty-residence began). Record it; everything keys off the day before this date. _(§877(e)(2))_ ## B.2 — Build the FMV net-worth balance sheet. - **B.2 — Build the FMV net-worth balance sheet** — Schedule all worldwide assets at fair market value less liabilities: real property, business interests, publicly traded and private securities, pension and deferred-comp present values, vested and unvested options/RSUs, IRAs and other tax-deferred accounts, and beneficial interests in trusts. Compare to the $2,000,000 fixed threshold. _(§877(a)(2)(B))_ ## B.3 — Compute the 5-year average net income tax. - **B.3 — Compute the 5-year average net income tax** — Pull the net US income tax from the 5 returns ending before the expatriation year, average them, and compare to the current-year indexed threshold (confirm current year). _(§877(a)(2)(A))_ ## B.4 — Determine covered status. - **B.4 — Determine covered status** — Apply the A.2 tree: net-worth OR income OR certification-failure ⇒ covered. Apply the A.4 exceptions (dual-citizen / minor) only to the net-worth and income tests, never to certification. Record which test(s) are met and why. _(§877A(g)(1), §877(a)(2))_ ## B.5 — If covered, compute the exit tax. - **B.5 — If covered, compute the exit tax** — Mark all non-special-regime property to market (FMV day-before less basis), net the gains and losses, subtract the indexed net-gain exclusion (confirm current year), and apply the relevant capital-gain / ordinary rates. Apply the §877A(b) deferral election only if security and a treaty waiver are in place. Separately run the special regimes (A.5): ineligible deferred comp and tax-deferred accounts as deemed distributions; eligible deferred comp and non-grantor-trust interests as 30% future-payment withholding. _(§877A(a), (b), (d), (e), (f))_ ## B.6 — Prepare Form 8854. - **B.6 — Prepare Form 8854** — Complete Form 8854 (Initial and Annual Expatriation Statement) to establish the expatriation date and certify 5 years of compliance. Remember: non-filing or non-certification of Form 8854 is itself the certification test failing, which makes the person covered regardless of B.2/B.3. Note any annual Form 8854 obligations (e.g. while a deferral election is outstanding). _(Form 8854; §877(a)(2)(C))_ ## B.7 — Flag §2801 exposure. - **B.7 — Flag §2801 exposure** — If covered, note in the reviewer brief that future gifts/bequests from this person to US persons fall under the §2801 recipient transfer-tax regime. _(IRC §2801)_ ## B.8 — Assemble working paper + reviewer brief - **B.8 — Assemble working paper + reviewer brief** — Assemble working paper + reviewer brief and route to request_accountant_review. Mark every indexed figure as confirm current year. ## ⚑ AUDIT FLASH POINT — net-worth valuation is broader than people expect. The $2M net-worth test is computed at fair market value and includes pension and deferred-compensation present values, vested and unvested equity (options/RSUs), IRAs and other tax-deferred accounts, and beneficial interests in trusts (including hard-to-value non-grantor-trust interests). Omitting illiquid or "not really mine yet" assets is the classic understatement that flips a determination. Value conservatively and document the method. ## ⚑ AUDIT FLASH POINT — the certification trap (§877(a)(2)(C)). Non-filing or non-certification of Form 8854 makes the person a covered expatriate regardless of net worth or income tax. A person well under the $2M and income thresholds is still covered if they cannot certify 5 clean years. The dual-citizen and minor exceptions do not waive certification. Never conclude "not covered" without confirming a valid Form 8854 certification. ## ⚑ AUDIT FLASH POINT — deferred comp and IRA deemed distribution (§877A(d), (e)). Ineligible deferred compensation is a deemed lump-sum distribution of present value, and specified tax-deferred accounts (IRAs, §529, Coverdell, HSA/MSA) are a deemed full distribution — both taxed up front, not marked to market. The 10% early-distribution additional tax does not apply to the §877A(e) deemed distribution. Do not fold these into the mark-to-market gain pool. ## ⚑ AUDIT FLASH POINT — non-grantor-trust 30% withholding (§877A(f)). A covered expatriate's interest in a non-grantor trust is not marked to market; instead the trustee withholds 30% of the taxable portion of each distribution to the covered expatriate, indefinitely. Confirm the trust's grantor/non-grantor classification with us-foreign-trust-reporting before applying either treatment — getting the classification wrong changes the entire mechanism. ## ⚑ AUDIT FLASH POINT — dual-citizen exception conditions (§877A(g)(1)(B)(i)). The exception applies only if the person became a US and foreign citizen at birth, remains a citizen of and taxed as a resident of that other country on the expatriation date, AND was a US resident for no more than 10 of the 15 tax years ending with the expatriation year. All conditions must hold, and Form 8854 certification is still required. Naturalized citizens and acquired-later dual citizens do not qualify. ## Topic self-checks - [ ] Is the person a renouncing **citizen** or an **LTR** (8-of-15-years, §877(e)(2))? Expatriation date fixed and recorded? - [ ] Was the **exit-tax test and date fixed BEFORE** any post-expatriation disposal was planned (router sequencing rule)? - [ ] FMV net-worth balance sheet built, **including** pensions, options, IRAs and **trust interests**? Compared to the **fixed $2,000,000** threshold? - [ ] 5-year average net income tax computed and compared to the **indexed threshold** — figure marked *confirm current year*? - [ ] **Form 8854 certification** confirmed? (Non-certification = covered, regardless of net worth/income.) - [ ] Covered status concluded under the A.2 tree, with the dual-citizen / minor exceptions applied **only** to net-worth/income, never to certification? - [ ] Mark-to-market gain computed with the **indexed net-gain exclusion** marked *confirm current year*? Loss and §1091 wash-sale rules considered? - [ ] Special regimes run separately — ineligible deferred comp and tax-deferred accounts as **deemed distributions**; eligible deferred comp and non-grantor-trust interests as **30% withholding** (§877A(d)–(f))? - [ ] **§877A(b)** deferral election only assumed where security + treaty waiver exist? - [ ] **§2801** recipient transfer-tax exposure flagged in the reviewer brief? - [ ] `us-foreign-trust-reporting` cross-referenced for any trust interest? - [ ] All indexed figures marked *confirm current year*; no invented citations; no claim that a human has signed off? ## Disclaimer Provides computational and interpretive guidance on IRC §877A/§877 expatriation and Form 8854 only. Not tax or legal advice and not a filed return. Covered-expatriate status, asset valuation, and the exit-tax computation turn on entity-specific facts and significant judgement. Have outputs reviewed and signed by a qualified, licensed accountant before acting. Research-verified (tier 2) pending credentialed sign-off.