Section 877A (Tax responsibilities of expatriation) imposes a MARK-TO-MARKET "exit tax" on COVERED EXPATRIATES - US citizens who relinquish citizenship and long-term residents (LPRs of 8 of 15 prior years per §7701(b)(6)) who terminate residency. Enacted by the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART, P.L. 110-245), effective for expatriations on or after June 17, 2008. All property of covered expatriate treated as SOLD on day BEFORE expatriation date for fair market value (§877A(a)(1)). Gain recognized in year of deemed sale notwithstanding any other Code provision; losses recognized to extent otherwise allowed (wash sale rules §1091 NOT applied; §469 passive losses NOT triggered; §121 home sale exclusion NOT available for deemed sale). Net gain reduced by INFLATION-INDEXED EXCLUSION AMOUNT - $890,000 (2025) per IRS Instructions Form 8854; $910,000 (2026). COVERED EXPATRIATE TESTS - meeting ANY of three triggers (§877A(g)(1)): (1) AVERAGE ANNUAL NET INCOME TAX for 5 years before expatriation exceeded $206,000 (2025) / $211,000 (2026); (2) NET WORTH $2,000,000 or more on expatriation date; (3) FAILED TO CERTIFY tax compliance for 5 prior years (on Form 8854 declaration). Two exceptions (§877A(g)(1)(B)), which relieve only the income tax and net worth tests (not the certification test): dual citizens at birth meeting specific tests; certain minors under age 18½. §877A(c) ALTERNATIVE TAX REGIMES - mark-to-market does NOT apply to: deferred compensation items, specified tax-deferred accounts (IRAs and similar accounts; 401(k)s are deferred compensation items), nongrantor trust interests where covered expatriate was beneficiary. Each has separate treatment: ELIGIBLE DEFERRED COMP (§877A(d)(1)) - 30% withholding by payor on each distribution; INELIGIBLE DEFERRED COMP (§877A(d)(2)) - present value of accrued benefit treated as received day before expatriation; SPECIFIED TAX-DEFERRED ACCOUNTS (§877A(e)) - treated as having received distribution of entire interest day before expatriation (immediate income inclusion); NONGRANTOR TRUSTS (§877A(f)) - 30% withholding by trustee on distributions; alternative election to treat as receiving full value if trust ruling obtained. §877A(b) DEFERRAL ELECTION - taxpayer may elect to defer payment of mark-to-market tax with respect to specific property until property actually sold; requires ADEQUATE SECURITY (bond meeting §6325 requirements) and IRREVOCABLE WAIVER of treaty rights. Interest accrues under §6601 at the underpayment rate (§6621) from the original due date (§877A(b)(7)). §2801 SUCCESSION TAX (added by HEART) - imposes 40% gift/estate tax rate on COVERED GIFTS or COVERED BEQUESTS received by US person from covered expatriate post-expatriation; paid by US RECIPIENT (not expatriate); final regulations T.D. 10027 January 14, 2025; Reg §28.2801 implements; Form 708 (Return of Tax for Gifts and Bequests Received From Covered Expatriates) required.
Who: "Covered expatriates" - US citizens relinquishing citizenship or LPRs of 8 of last 15 years terminating residency, who meet ANY of: $206K (2025) average tax liability for 5 prior years, $2M net worth, or fail 5-year tax compliance certification.
Mark-to-market deemed sale: All property deemed sold day before expatriation at FMV. Gain reduced by exclusion - $890,000 (2025), $910,000 (2026). Taxed at applicable rates (LTCG, ordinary, §1250, etc.).
Special asset treatment: IRAs and other specified tax deferred accounts - entire balance treated as distributed the day before expatriation (immediate ordinary income; no early distribution tax, §877A(e)(1)(B)). Eligible deferred comp (including 401(k)s and other §219(g)(5) plans) - 30% withholding by payor; ineligible deferred comp - present value treated as received. Nongrantor trusts - 30% withholding by trustee.
Deferral option §877A(b): May elect to defer mark-to-market tax with adequate security (bond) and treaty waiver; interest accrues at the underpayment rate (§6601, §6621); deferred tax is due on the return for the year the property is disposed of, and in no event later than the return for the year of death (§877A(b)(1), (b)(3)).
§2801 successor liability: US persons receiving GIFTS or BEQUESTS from covered expatriate post-expatriation pay 40% on amount above annual exclusion - final regs T.D. 10027 (January 14, 2025) - Form 708 reporting; tax paid by US RECIPIENT not expatriate.
| Trigger | Detail |
|---|---|
| Income tax liability test §877A(g)(1)(A) / §877(a)(2)(A) | Average annual net income tax for 5 tax years ending before expatriation exceeded inflation-indexed threshold: $171,000 (2020), $172,000 (2021), $178,000 (2022), $190,000 (2023), $201,000 (2024), $206,000 (2025), $211,000 (2026) |
| Net worth test §877A(g)(1)(A) / §877(a)(2)(B) | Net worth of $2,000,000 or more on expatriation date (NOT inflation-indexed) |
| Tax compliance certification test §877A(g)(1)(A) / §877(a)(2)(C) | Failure to certify on Form 8854 under penalty of perjury that ALL federal tax obligations met for 5 years preceding expatriation |
| Exception 1 - Dual citizens at birth §877A(g)(1)(B) | Became US citizen and citizen of another country at birth; continues to be citizen and tax resident of that country at expatriation; been US tax resident for no more than 10 of 15 years ending with expatriation year |
| Exception 2 - Certain minors §877A(g)(1)(B) | Relinquished US citizenship before age 18½ AND been US tax resident for no more than 10 years before expatriation |
| Long-term resident (LPR) per §877(e) | LPR for at least 8 taxable years during 15-year period ending with year of residency termination (counting partial years as full years) |
| Treaty election as nonresident | LPR who elects to be treated as nonresident under treaty for tax purposes - considered to have terminated LPR status under §877A unless specific exception applies |
| MTM Element | Detail |
|---|---|
| Deemed sale date | DAY BEFORE expatriation date |
| Property covered | ALL property of covered expatriate worldwide (with §877A(c) exceptions) |
| Sales price | FMV on deemed sale date - documented appraisal recommended for non-publicly-traded property |
| Gain recognition | Notwithstanding any other Code provision - all gain recognized in year of deemed sale |
| Loss recognition | Limited to amounts otherwise allowed by Code; wash sale rules §1091 NOT applied |
| Passive losses §469 | NOT triggered/released by deemed sale (continue to be suspended) |
| §121 home sale exclusion | NOT available for deemed sale - principal residence inclusion in MTM |
| Subsequent realization adjustment §877A(a)(2) | On actual later sale, gain/loss adjusted (UP for basis included in MTM; DOWN for losses recognized) - prevents double tax |
| Exclusion amount §877A(a)(3) | $890,000 (2025), $910,000 (2026); reduces net gain (not below zero); inflation-adjusted from $600,000 (2008 base) |
| Character of gain | Preserved (LTCG for capital assets, §1245/§1250 recapture for depreciable, ordinary for inventory) |
| Application order | Compute gain/loss per asset; net gains and losses; reduce net gain by exclusion; tax at applicable rates |
Facts: James, US citizen, expatriating January 15, 2026. Assets and built-in gains (basis):
- Apple stock: FMV $3,000,000, basis $300,000 (LTCG)
- Boeing stock: FMV $400,000, basis $700,000 (loss)
- Rental property: FMV $2,000,000, basis $800,000, $200,000 depreciation taken (gain $1,400,000 includes $200,000 unrecaptured §1250 + $1,200,000 LTCG)
- Vacation home: FMV $1,500,000, basis $400,000 (LTCG; §121 NOT available)
- Foreign bank account: $500,000 (no gain)
- Foreign IRA equivalent: $0 (no gain on cash)
Step 1 - Deemed sale gains/losses (excluding deferred compensation, IRAs):
Apple: $2,700,000 LTCG
Boeing: ($300,000) LTCL (reported separately; not part of the exclusion allocation)
Rental: $1,400,000 ($200,000 unrecap §1250 + $1,200,000 LTCG)
Vacation: $1,100,000 LTCG
Total gain properties: $2,700,000 + $1,400,000 + $1,100,000 = $5,200,000
Step 2 - Allocate the §877A(a)(3) exclusion ($910,000 for 2026) to the gain properties pro rata by gain (Notice 2009-85 §3.B; Instructions for Form 8854, Part II, Section C, column (e)):
Apple: $2,700,000 / $5,200,000 × $910,000 = $472,500, leaving $2,227,500
Rental: $1,400,000 / $5,200,000 × $910,000 = $245,000, leaving $1,155,000
Vacation: $1,100,000 / $5,200,000 × $910,000 = $192,500, leaving $907,500
Total gain after exclusion: $2,227,500 + $1,155,000 + $907,500 = $4,290,000 ($5,200,000 - $910,000)
Assumption: within the rental property the exclusion reduces the unrecap §1250 gain and the LTCG pro rata, so unrecap §1250 gain = $1,155,000 × $200,000 / $1,400,000 = $165,000 and rental LTCG = $990,000
Step 3 - Calculate tax (assuming top brackets):
LTCG: $2,227,500 + $990,000 + $907,500 = $4,125,000, less Boeing LTCL $300,000 = net LTCG $3,825,000 × 20% = $765,000
Unrecap §1250 gain: $165,000 × 25% = $41,250
Net gain subject to tax: $3,825,000 + $165,000 = $3,990,000
Plus NIIT 3.8% on $3,990,000 = $151,620
Subtotal federal MTM tax: $957,870
Step 4 - Specified tax-deferred accounts (separate treatment):
If James had traditional IRA with $500,000 balance - treated as distributed day before expatriation; $500,000 ordinary income at ~37% = $185,000 additional tax (no early distribution tax per §877A(e)(1)(B))
Total federal exit tax: $957,870 + $185,000 = $1,142,870 (~$1,143,000)
Optional §877A(b) deferral election: James can post bond covering tax + interest for some/all assets; defer payment until actual disposition; interest accrues at the underpayment rate (§6601, §6621); must waive treaty benefits irrevocably; deferred tax is due on the return for the year of disposition and no later than the return for the year of death.
| Asset Category | Treatment Under §877A |
|---|---|
| ELIGIBLE deferred compensation §877A(d)(1) | Payor is a US person (or a foreign payor that elects to be treated as one, §877A(d)(3)(A)); covered expatriate notifies payor on Form W-8CE; payor withholds 30% on each future taxable payment; treaty benefits waived; no immediate MTM |
| INELIGIBLE deferred compensation §877A(d)(2) | Non-qualified plans, foreign plans, certain other arrangements; present value of accrued benefit on day before expatriation TREATED AS RECEIVED - full ordinary income inclusion immediately; subsequent payments excluded from income |
| Specified tax-deferred accounts §877A(e) | Individual retirement plans under §7701(a)(37) (traditional and Roth IRAs; SEP and SIMPLE arrangements under §408(k) and (p) are excluded), 529 and ABLE accounts, Coverdell ESAs, HSAs and Archer MSAs (§877A(e)(2)); 401(k), 403(b) and other qualified plan interests are deferred compensation items under §877A(d); treated as having received FULL DISTRIBUTION on day before expatriation; ordinary income inclusion at full balance; 10% early withdrawal penalty under §72(t) NOT applied; basis recovery for Roth |
| Nongrantor trusts where covered expatriate is beneficiary §877A(f) | 30% WITHHOLDING by trustee on each distribution to covered expatriate; treaty benefits waived; alternative election - treat as receiving full value of interest day before expatriation if trust ruling obtained |
| Grantor trusts | Treated as owned by grantor; assets subject to MTM as if owned directly |
| §684 transfer to foreign nongrantor trust | Triggered if covered expatriate transfers appreciated property to foreign trust at expatriation (loss of US grantor status); deemed sale recognized |
| Deferral Element | Detail |
|---|---|
| Authority | §877A(b) - irrevocable election |
| Made by | Property - separate election per property; can mix (defer some, pay current on others) |
| Adequate security required | Bond meeting §6325 requirements (acceptable to Treasury); other security forms by Treasury approval |
| Treaty waiver required | Irrevocable waiver of treaty rights that would preclude assessment or collection of §877A tax |
| Interest accrual | At the underpayment rate under §6601(a) and §6621; accrues from the original due date until paid (§877A(b)(7)) |
| Due date and termination §877A(b)(1), (b)(3) | Deferred tax on a property is due on the return for the year the property is disposed of; in no event later than the due date of the return for the year of death, or, if earlier, when the security fails the §877A(b)(4) requirements (unless corrected within the time the Secretary specifies) |
| Practical considerations | Useful for illiquid property (closely-held business, real estate); bond cost vs current tax liability; estate planning consideration |
| Annual reporting | Form 8854 annually showing deferred property and value |
| Bond release | Upon payment of tax (with interest); pro rata for sold portions |
| §2801 Element | Detail |
|---|---|
| Authority | IRC §2801 (HEART Act 2008); Final Regs T.D. 10027 (January 14, 2025); Reg §28.2801-1 through Reg §28.2801-7 |
| Tax | 40% on covered gift / bequest received by US person from covered expatriate |
| Paid by | US RECIPIENT (donee/heir), NOT expatriate |
| Covered gift / bequest defined | Direct or indirect transfer of property from covered expatriate, regardless of property situs or when expatriate acquired property |
| Exclusions | (a) Annual gift tax exclusion §2503(b) amount ($19,000 for 2025; $19,000 for 2026); (b) gifts reported on covered expatriate's gift tax return at time of gift (or estate tax return); (c) marital deduction transfers under §2056 to US citizen spouse; (d) charitable transfers |
| Form 708 | Return of Tax for Gifts and Bequests Received From Covered Expatriates - filed by US RECIPIENT; due on the 15th day of the 18th calendar month following the close of the calendar year in which the covered gift or bequest was received (Reg §28.6071-1(a)(1)); automatic 6-month extension of time to file by filing the extension form IRS specifies, with no extension of time to pay (Reg §28.6081-1(b), (c)) |
| Cumulative tracking | Annual exception applies to the aggregate value of all covered gifts and bequests the recipient receives in the calendar year (§2801(c)); recipient tracks own receipts |
| Treaty interaction | Estate/gift tax treaties or income tax treaties may modify §2801 application; case-by-case analysis |
| Indirect transfers | Discretionary trust distributions to US persons treated as covered gifts if trust funded by covered expatriate; tiered structure look-through |
| Foreign trust receiving covered gift | Tax applies to distributions attributable to the covered gift or bequest from a foreign trust to US citizens or residents (§2801(e)(4)(B)(i)); a foreign trust may elect to be treated as a domestic trust for §2801 (§2801(e)(4)(B)(iii)) |
| Form 8854 Element | Detail |
|---|---|
| Initial Form 8854 | Filed in year of expatriation; attached to final Form 1040 (or Form 1040-NR for partial year) |
| Due date | Same as Form 1040 - April 15 (with extensions); plus copy to specified IRS address |
| Part I - General Information | Completed by all filers: identifying information, countries of citizenship, expatriation date, lawful permanent resident dates (Lines 1-8c) |
| Part II - Initial Expatriation Statement | For persons who expatriated in the filing year. Section A: expatriation information (5-year net income tax, net worth, dual-citizen and minor questions, Line 7 certification of 5-year tax compliance); Section B: balance sheet; Section C: property owned on the date of expatriation (covered expatriates only, including the exclusion allocation in column (e)); Section D: deferral of tax |
| Part III - Annual Expatriation Statement | For persons who expatriated before the filing year and previously deferred tax, reported an eligible deferred compensation item, or reported an interest in a nongrantor trust |
| Annual Form 8854 | Required (Parts I and III) each year for a person who expatriated in an earlier year and, on a prior-year Form 8854, deferred payment of tax, reported an eligible deferred compensation item, or reported an interest in a nongrantor trust |
| Penalty for failure | $10,000 per year unless reasonable cause - separate from tax liability |
| Relief Program Element | Detail |
|---|---|
| Authority | September 2019 IRS announcement; updated periodically |
| Eligibility | Individuals whose past compliance failures were non-willful, who relinquished US citizenship after March 18, 2010, and who have no filing history as a U.S. citizen or resident |
| Requirements | (a) Average annual net income tax for 5 years before relinquishment did not exceed certain threshold; (b) net worth less than $2,000,000 at expatriation and at submission (no dual-citizen or minor exception); (c) aggregate total tax liability of $25,000 or less for the 5 tax years before expatriation and the year of expatriation (after credits, excluding §877A, penalties and interest); (d) all required returns and information returns for the six tax years at issue submitted (FBARs are not an eligibility criterion but should be filed if required) |
| Benefit | NOT treated as covered expatriate - avoids §877A MTM and §2801 succession tax |
| Application | Submit the Certificate of Loss of Nationality, identification and the six years of returns marked "Relief for Certain Former Citizens" in red ink; file FBARs separately with FinCEN if required |
| One-time relief | Each person can use only once |
| Coordination with Streamlined Filing | Cannot use both - choose one program |
Even taxpayer below $206K income and $2M net worth becomes covered expatriate if they cannot certify 5 years of tax compliance. Foreign-resident citizens often missing FBARs or Form 8938 for years - certification failure = covered expatriate status.
Traditional IRAs and other specified tax deferred accounts are treated as fully distributed the day before expatriation - full balance is ordinary income (401(k)s are deferred compensation items governed by §877A(d), not this rule). Practitioners often miss this large income inclusion, especially for high-balance retirement accounts. NO early distribution tax (including the 10% additional tax under §72(t)) applies (§877A(e)(1)(B), (g)(6)).
Principal residence FMV is included in MTM deemed sale; §121 home sale exclusion NOT available because no actual sale occurred. Practitioner using §121 to reduce MTM is wrong.
If covered expatriate is beneficiary of nongrantor trust on day before expatriation, trustee must withhold 30% on EACH future distribution under §877A(f). Trustee not informed = personal liability. Form 8854 is filed with the IRS; a covered expatriate notifies a payor of eligible deferred compensation on Form W-8CE.
LPR test: 8 taxable years in 15-year period; partial years counted as full years. Practitioners often undercount or miscalculate "abandoned" status. Form I-407 LPR abandonment vs continued LPR status critical.
LPR who claims treaty residence in foreign country (treaty tie-breaker) deemed to have terminated LPR status under §877(e) - may trigger §877A. Often overlooked when foreign country tax treaty residence claimed on Form 8833.
US persons receiving gifts/bequests from covered expatriate post-expatriation pay 40% on excess of annual exclusion. RECIPIENT files Form 708 and pays tax - many recipients unaware. Final regs T.D. 10027 (January 14, 2025) operational.
Covered expatriate who owned domestic grantor trust loses grantor status at expatriation (no longer US person); §684 may require immediate gain recognition on appreciated trust assets. Often missed by trust practitioners.
MTM requires FMV on deemed sale date for ALL worldwide property. Foreign-held assets often poorly documented. Engage appraisers for closely-held businesses, foreign real estate, art, intellectual property. IRS may challenge undocumented FMV claims.
Even after expatriation year, Form 8854 (Parts I and III) is required annually if, on a prior-year Form 8854, the Client deferred payment of tax, reported an eligible deferred compensation item, or reported an interest in a nongrantor trust. $10,000 per year penalty for missing.
2019 Relief Procedures only for taxpayers below specific thresholds ($25K total US tax over 5 years + expatriation year; $2M net worth; income limits). High-income/high-net-worth taxpayers ineligible. Don't promise relief inappropriately.
Pre-expatriation: gifts under annual exclusion to US persons (avoid §2801); maximize charitable giving (no §2801 impact); convert IRAs to Roth pre-expatriation (already-taxed Roth not immediate income at expatriation); consider gift to non-US persons (no §2801 because recipient not US). Many practitioners miss timing-sensitive planning.
Wash sale §1091 not applied to MTM losses; passive activity §469 losses NOT triggered. Practitioners may incorrectly assume MTM unlocks all losses.
Expatriates before June 17, 2008 fall under old §877 (10-year US source income test); §877A applies on/after June 17, 2008. Different mechanics - don't conflate.
Foreign retirement plans (RRSPs, UK SIPPs, Australian Super) - generally NOT specified tax-deferred accounts under §877A(e); often deferred compensation items §877A(d). Classification affects treatment. Foreign Pension Reporting guide covers this.
§877A applies notwithstanding any other Code provision (§877A(a)(2)). Tax treaties generally cannot override unless specific savings clause exception. Some treaties (e.g., older treaties) may have limited interaction with §877A.
California, NY, NJ - state income tax on MTM gain to extent attributable to in-state residence period. State conformity to federal MTM varies. Final state return for partial year required.
Primary authority: IRC §877A (Tax responsibilities of expatriation - Heroes Earnings Assistance and Relief Tax Act 2008, P.L. 110-245, effective June 17, 2008). §877A(a)(1) (mark to market). §877A(a)(2) (recognition of gain or loss - notwithstanding any other Code provision). §877A(a)(3) (exclusion amount - inflation-adjusted from $600,000 base; $890,000 for 2025; $910,000 for 2026). §877A(b) (deferral election - bond and treaty waiver required). §877A(c) (exceptions to mark-to-market - deferred compensation, specified tax-deferred accounts, nongrantor trusts). §877A(d)(1) (eligible deferred compensation - 30% withholding by payor). §877A(d)(2) (ineligible deferred compensation - present value treated as received). §877A(e) (specified tax-deferred accounts - treated as distributed in full). §877A(f) (nongrantor trusts - 30% trustee withholding). §877A(g)(1)(A) (covered expatriate - meets §877(a)(2)(A), (B) or (C)). §877(a)(2)(A) (income tax liability test - $206,000 for 2025; $211,000 for 2026 average annual). §877(a)(2)(B) (net worth test - $2,000,000 - not inflation-indexed). §877(a)(2)(C) (5-year tax compliance certification). §877A(g)(1)(B) (exceptions to the income tax and net worth tests only - dual citizens at birth, certain minors). §877A(g)(2) (expatriate definition). §877A(g)(3) (expatriation date). §877A(g)(4) (relinquishment of citizenship - earliest of the listed events). §877 (alternative tax regime for pre-June 17, 2008 expatriates). §877(e) (long-term resident definition - 8 of 15 years). §7701(b)(6) (lawful permanent resident definition). §2801 (transfer tax on gifts and bequests from covered expatriates - 40% paid by US recipient). §2503(b) (annual gift tax exclusion). §2056 (marital deduction). §684 (transfer of property to foreign trust - immediate recognition for non-grantor status). §72(t) (10% early withdrawal penalty - NOT applied under §877A(e)). §469 (passive activity losses - not triggered by MTM). §1091 (wash sale - NOT applied to MTM losses). §121 (principal residence exclusion - NOT available for MTM deemed sale). §1(h)(1)(E) (unrecaptured §1250 gain - max 25%). §1411 (NIIT - 3.8% applies to MTM gain). §6325 (adequate security). §6601 (interest on underpayments - applies to deferred MTM tax). §6694, §6662 (preparer/accuracy penalties). Reg §28.2801-1 through §28.2801-7 (§2801 final regulations). Notice 2009-85 (initial §877A guidance). Treasury Decision 10027 (January 14, 2025) - final regulations on §2801 covered gifts and bequests. Form 8854 (Initial and Annual Expatriation Information Statement). Form 708 (Return of Tax for Gifts and Bequests Received From Covered Expatriates). Form 4868 (extension). Heroes Earnings Assistance and Relief Tax Act 2008 (P.L. 110-245). Relief Procedures for Certain Former Citizens (IRS announcement September 2019). 2025 instructions to Form 8854 ($206,000 income threshold; $890,000 exclusion). Rev. Proc. 2025-32 sections 4.37, 4.38 and 4.42 (2026: $211,000 income tax test; $910,000 exclusion; $19,000 section 2801 exception).