If you hold a green card and think you might leave the US someday, there’s a phrase you need to meet long before any moving trucks show up: covered expatriate. The covered expatriate rules decide whether giving up a green card is a quiet paperwork event or a taxable one, potentially treated as if you sold everything you own the day before departure. I’m Dako, the Japanese half of this blog’s marriage, and I’ve been reading these rules for a personal reason. There’s a green card in our own household, and our family hasn’t decided whether we’ll keep our life in the US, move to Japan, or split time between both. This post explains the three tests that determine covered expatriate status, in plain English, with the 2026 numbers.
What “covered expatriate” actually means
The US taxes its citizens and permanent residents on worldwide income. When someone exits that system, section 877A of the tax code decides whether they owe a toll on the way out. People call it the exit tax.
Here’s the part that surprises green card holders: the rules don’t only apply to citizens who renounce. They apply to “long-term residents,” meaning anyone who held a green card in at least 8 of the 15 tax years ending with the year they give it up. Hit that mark and hand back your card, and the IRS treats you as an expatriate under IRC 877A, same as a citizen renouncing at an embassy.
Being an expatriate isn’t the expensive part. The expensive part is being a covered expatriate. That label attaches only if you trip at least one of three tests, and it’s what triggers the deemed sale of your assets, harsh treatment of retirement accounts, and a lasting tax on gifts you later make to people in the US.
One more trap worth naming early: partial years count as full years for the 8-of-15 clock. A green card received in December 2019 starts the count at 2019, not 2020.
The three tests
You’re a covered expatriate if, on the date you expatriate, any one of the following is true. One is enough.
The net worth test
Your worldwide net worth is $2 million or more. Everything counts at fair market value: home equity, brokerage accounts, retirement accounts, business interests, assets held back in Japan or anywhere else. The number is measured per person, not per couple, which cuts both ways. A couple with $3.5 million split evenly may have neither spouse over the line, while the same wealth held mostly in one name puts that spouse over it.
Two things make this test bite harder every year. It has been $2 million since 2008, with no inflation adjustment, and ordinary FIRE-style saving walks straight toward it. A paid-off house plus two decades of index fund contributions gets there without anyone feeling rich.
The tax liability test
Your average annual net US income tax for the five years before expatriation exceeds a threshold that does adjust for inflation: $211,000 for 2026, up from $206,000 in 2025. Note that this is tax paid, not income. Most households never approach it. The known trap is for joint filers, where the full tax shown on a joint return is generally attributed to each spouse for this test, so a modest earner married to a high earner can fail through no income of their own. If your returns are anywhere near this zone, this specific point deserves professional eyes.
The certification test
You must certify on Form 8854, under penalty of perjury, that you’ve complied with all US federal tax obligations for the five preceding years. Can’t certify, and you’re a covered expatriate automatically, even with a modest net worth and ordinary tax bills.
This is the test that catches immigrants, and it’s the one I’d call cheapest to fix in advance. Missed FBARs, an overlooked foreign account, unfiled forms for assets back home: these are fixable years ahead of a move and painful to fix in the year of one.
What happens if the label sticks
Covered expatriates face a mark-to-market regime. The tax code pretends you sold all your property at fair market value on the day before expatriation, then taxes the paper gain above an exclusion: $910,000 for 2026 ($890,000 in 2025), indexed annually and spread proportionally across your appreciated assets.
Retirement money gets its own, rougher treatment. Tax-deferred accounts such as IRAs are generally treated as fully distributed the day before expatriation and taxed as ordinary income, though without the early-withdrawal penalty. Certain deferred compensation, including many 401(k) arrangements, instead faces 30% US withholding on future distributions. There’s also a sting that outlives you: gifts and bequests from a covered expatriate to US persons can be taxed to the recipient at the top gift tax rate. If your kids stay American when you leave, that one deserves a long look.
The exclusion means many covered expatriates owe little or nothing on the deemed sale itself. The compliance burden, the retirement account treatment, and the gift rule are why the label is worth planning around anyway.
How to check where you stand
Here’s the once-a-year exercise our household runs. One evening covers it.
- Count your 8-of-15 years as a green card holder, remembering that partial years count against you
- List worldwide assets per spouse at rough fair market value, including home equity and accounts in Japan
- Average the last five years’ total tax
- Confirm the last five years are clean: returns filed, FBARs filed, foreign assets reported
- Rerun it every year, since the thresholds and your balances both move
If step 2 lands anywhere near $2 million per person, or step 4 turns up gaps, that’s the moment to pay for an hour with a cross-border tax professional. Years before a move, your options are wide. In the year of the move, they’re mostly gone.
Where we stand in our own plan
Our household’s 8-of-15 clock is already running, and one of the honest reasons this blog exists is that the net worth test is exactly the kind of line a FIRE plan crosses on purpose. We haven’t decided whether anyone in this family will ever hand back a green card. Keeping it has real costs too, which is its own future post. For now we do the five steps above once a year and treat the result as a fact about our plan, not a verdict on it.
Jay’s take: I’m the American in this marriage, so no exit tax applies to me unless I renounce citizenship, which I’m not planning. What struck me reading Dako’s research is the joint-return trap in the tax liability test. Filing jointly is the default good advice for most couples, and it quietly changes this one calculation for the immigrant spouse. Nobody at the green card interview mentions that.
FAQ
Does giving up a green card before 8 years avoid the exit tax?
Generally yes, the regime applies to long-term residents, meaning 8 or more of the last 15 tax years. But partial years count as full years, and treaty positions can complicate the count. Verify your own years carefully before relying on this.
Is the $2 million net worth test per person or per couple?
Per person, measured at fair market value on the expatriation date. How assets are titled between spouses matters, which is why gifting between spouses appears in most planning conversations. Interspousal transfers have their own rules, especially with a non-citizen spouse, so get advice before moving assets.
Do 401(k) and IRA balances count toward the $2 million?
Yes. The net worth test looks at all worldwide assets, including retirement accounts and real estate equity in any country.
What if I can’t certify five years of tax compliance?
You’d be a covered expatriate automatically, regardless of wealth. If you have unfiled forms or missed FBARs, cleaning them up well before any expatriation date is usually possible and far cheaper than the alternative. A cross-border tax professional can map the options.
If the exclusion is $910,000, do most people owe nothing?
Many owe little on the deemed sale itself, since the 2026 exclusion shields the first $910,000 of gain. The retirement account rules, 30% withholding on some deferred compensation, and the tax on future gifts to US persons don’t care about the exclusion, though. The label costs more than the headline tax.
This is general information, not tax or legal advice, and we are not tax professionals. The rules sketched here have exceptions and edge cases that matter. Before making any decision about a green card or a move, consult a CPA or attorney who works on cross-border cases. Primary sources: the IRS pages on expatriation tax and Form 8854. See our Disclaimer.
Last updated: July 30, 2026. Figures shown are for 2026 and adjust annually.