The term “exit tax” sometimes comes up loosely in the context of a repatriating assignee’s tax to-do list, but the actual Exit Tax under Internal Revenue Code Section 877A applies only to people who renounce U.S. citizenship, or long-term green card holders who abandon or lose their lawful permanent residency. A typical assignee on an L-1 or E-2 visa who has never held a green card is generally not affected by this regime at all. This article explains how Exit Tax works for green card holders specifically, and the criteria for becoming a “covered expatriate.”
Who’s Affected: The Definition of a “Long-Term Resident”
Exit Tax applies to a green card holder when that person qualifies as a “long-term resident” for tax purposes and then abandons or loses their permanent residency. A long-term resident is defined as someone who held a green card for 8 or more of the 15 tax years ending with the year residency terminates. Note that under the US-Japan tax treaty, claiming Japanese resident status to break U.S. tax residency (a “treaty tie-breaker” position) is also treated as a deemed abandonment of the green card for tax purposes — so this can trigger the rules even if you never formally surrender your green card.
The Three Tests for Becoming a “Covered Expatriate”
When a long-term resident gives up permanent residency, meeting even one of the following three tests makes them a “covered expatriate,” triggering the full Exit Tax regime:
- Net worth test: worldwide net worth of $2 million or more on the date of expatriation
- Average tax liability test: average annual federal income tax liability over the prior 5 years exceeds a threshold that’s adjusted for inflation each year ($211,000 for 2026)
- Tax compliance certification test: inability to certify on Form 8854, under penalties of perjury, that you’ve complied with all federal tax obligations for the preceding 5 years
The third test is especially easy to overlook. Even if your net worth and average tax liability are both well under the thresholds, if there were errors or omissions in past tax returns that you can’t certify on Form 8854 as having been properly resolved, that alone makes you a covered expatriate.
How the Tax Works: Mark-to-Market Deemed Sale
Once you’re a covered expatriate, nearly all of your worldwide assets (including real estate and securities held in Japan) are treated as if sold at fair market value the day before you give up residency, and you’re taxed on the resulting capital gain (mark-to-market taxation). An exclusion applies to the first $910,000 of gain for 2026. Gain above that exclusion is taxed at the applicable rate for the year. Special rules — different from ordinary assets — apply to items like deferred compensation and non-grantor trusts (for example, 30% withholding on future distributions), so each type of asset needs to be reviewed individually.
An Overlooked Wrinkle: Tax on US Family Members Who Later Receive Gifts or Bequests
Once someone becomes a covered expatriate, if a U.S. citizen or resident later receives a gift or inheritance from them, Internal Revenue Code Section 2801 can impose a tax on the U.S. recipient at the top gift/estate tax rate. In other words, this regime doesn’t just affect the person who gave up their green card — it can also affect family members who remain in the U.S. (for example, a U.S.-citizen child), which is a less widely known consequence.
Frequently Asked Questions
Q: I’ve only had my green card for about 5 years. Does this apply to me?
A: If you haven’t held a green card for 8 of the last 15 tax years, you don’t meet the definition of a long-term resident in the first place, so Exit Tax doesn’t apply. At around 5 years, you’re generally not affected.
Q: Is filing Form I-407 (Abandonment of Lawful Permanent Resident Status) enough to complete the process?
A: Form I-407 with immigration authorities only ends your permanent residency; it’s separate from the tax filing (Form 8854) that addresses Exit Tax. Until you file Form 8854, the IRS can continue to treat you as not having given up residency for tax purposes, potentially exposing you to failure-to-file penalties — so both steps need to be completed.
This article is provided for general informational purposes only and is not a substitute for individualized tax advice. Threshold amounts are updated annually, so please confirm the current figures and consult a professional before making any determination or filing.
Summary
Exit Tax is a regime specific to long-term green card holders giving up permanent residency, not typical repatriating assignees. Meeting even one of the three tests — net worth, average tax liability, or tax compliance — makes you a covered expatriate, triggering the heavy burden of a deemed sale of your worldwide assets. If your green card is approaching the 8-year mark, or you’re considering giving it up, have a professional run the numbers before you do.
Related Articles
- The 8-Year Trap: Understanding the US Exit Tax for Long-Term Residents Abandoning Green Cards
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- US Estate Tax and Real Estate Investment: The $60,000 Exemption Wall for Nonresident Aliens, and How to Plan Around It
- The Definitive Guide to Filing US Tax Returns (1040/1040NR) from Japan After Repatriation: Procedures, Payment, and Refund Methods