By Dako
The scariest version of the story goes like this: you give up your green card, and the IRS takes half of everything on your way out.
I’ve now spent enough evenings inside section 877A of the tax code to tell you that version is wrong. The real rule is stranger and, for most families, less brutal. The US doesn’t confiscate anything. It pretends. On the day before you expatriate, the tax code pretends you sold every asset you own, everywhere in the world, and asks for capital gains tax on the imaginary profit. That pretend transaction is the exit tax, and IRC 877A is the statute that runs it.
I’m reading this law for personal reasons. There’s a green card in our household, we’re a US-Japan family, and we still haven’t decided whether our future is in the US, in Japan, or split between both. If any of that sounds familiar, the mechanics below are worth twenty minutes of your attention long before they’re worth a tax bill.
What the exit tax actually is
Start with why the rule exists. The US taxes citizens and permanent residents on worldwide income, year after year, wherever they live. Leaving that system for good is the one moment the IRS loses its future claim on your investment gains. Section 877A is the toll booth at that moment: a mark-to-market tax on unrealized gains, charged once, on the way out.
Three things follow from that design, and they do a lot of work in the rest of this post.
It’s a tax on paper gains, not on wealth. What matters isn’t the size of your portfolio but how much of it has never been taxed.
It’s calculated on one specific day. The law looks at fair market value the day before your expatriation date, which makes timing a real planning lever rather than a detail.
And it doesn’t apply to everyone who leaves. It applies only to people the code labels covered expatriates.
Who actually pays it
Two gates stand between an ordinary green card holder and this tax.
Gate one: you have to be an “expatriate” at all. For citizens, that means renouncing. For the rest of us, the term covers any long-term resident, defined as someone who held a green card in at least 8 of the 15 tax years ending with the year they hand it back. Partial years count as full years, so the clock fills faster than people expect. Give back a green card in year six, and 877A never enters the picture.
Gate two: you have to be a covered expatriate. That label attaches if your net worth is over $2 million per person, or if your average annual federal income tax over the past five years tops $211,000 (the 2026 figure). The third trigger: failing to certify five years of clean tax compliance on Form 8854. One test is enough. I wrote a whole post walking through the three covered expatriate tests with the traps in each, so here I’ll just say: the $2 million line is not indexed for inflation, and a FIRE portfolio grows toward it on purpose.
Clear both gates and the pretend sale is yours to compute.
How the mark-to-market calculation works
The mechanics are almost anticlimactic. List your worldwide assets. Assign each its fair market value on the day before expatriation. Compute the gain as if each one were sold at that price. Character and holding period carry over, so gains that would have been long-term capital gains in a real sale get long-term rates in the pretend one, currently 15% or 20% at the federal level.
There’s a detail here that matters enormously for immigrants, and I rarely see it mentioned. Under 877A(h)(2), property you already owned when you first became a US resident is treated as having a basis of no less than its fair market value on the day your US residency began. In plain terms: appreciation from before your American chapter generally isn’t part of the bill. A Tokyo apartment that tripled in value before you ever set foot in America is measured from the day you arrived, not the day you bought it. The step-up doesn’t cover US real estate or US business property, and you can irrevocably elect out of it in cases where the historical basis works better. But for anyone who arrived with existing assets, this one subsection can shrink the whole problem.
If a large bill does materialize, the law allows you to defer payment on the deemed sale until you actually sell the asset, in exchange for posting security and paying interest. That’s a specialist conversation, not a DIY one.
The exclusion amount, and why most of the fear is misplaced
Now the number that defuses most of the horror stories. The first $910,000 of pretend gain is simply excluded. That’s the 2026 figure, up from $890,000 in 2025, and it adjusts for inflation every year.
You don’t get to aim the exclusion at whichever asset is most convenient. It’s allocated across all your appreciated assets in proportion to their gains. Still, the practical effect is blunt: a couple where each spouse is a covered expatriate would need well over $1.8 million in combined unrealized gains, not assets, before the deemed sale itself produces a dollar of tax.
So why does anyone lose sleep over this? Because the mark-to-market piece is only half the statute. The other half is where the real money usually is.
What the pretend sale doesn’t touch
Retirement money never enters the mark-to-market math. It gets its own set of rules instead, and for many households those rules end up costing more than the celebrated pretend sale ever would.
Tax-deferred accounts like IRAs, plus HSAs and 529 plans, are treated as fully distributed the day before expatriation. The whole balance lands on your final return as ordinary income. The one mercy is that the usual early-distribution penalty generally doesn’t apply.
Most 401(k)s and pensions follow a different path, as “eligible deferred compensation.” No deemed distribution up front. Instead, every future payment to you carries a flat 30% US withholding, and to get this treatment you file Form W-8CE and permanently waive any treaty rate that might have helped you. The W-8CE deadline is unforgiving: the earlier of the day before your first post-expatriation distribution or 30 days after you expatriate. Foreign pensions and some other arrangements fall into an “ineligible” bucket that’s taxed immediately on the present value of the accrued benefit. Distributions from nongrantor trusts pick up their own 30% withholding as well.
And one sting outlives the whole event: gifts and bequests you later make to US persons, your American spouse or kids included, can be taxed to the recipient at the top gift tax rate. Covered status follows your money even after you’re gone.
Everything above gets reported on Form 8854, and skipping it can cost $10,000 by itself. If you remember one asymmetry from this post, make it this: the famous pretend sale comes with a $910,000 cushion, while the retirement account rules come with none.
How this shapes our own decision timeline
Our household’s 8-of-15 clock is already running. We haven’t decided whether anyone here will ever give back a green card, and this blog exists partly because that decision refuses to be simple.
What 877A changes for us isn’t the destination. It’s the shape of the calendar. Before year eight, walking away from a green card is mostly immigration paperwork. After year eight, it’s a tax computation with our whole balance sheet in it. So the two of us do a short exercise once a year: recount the years, list the assets and the unrealized gains per spouse, check the thresholds, confirm the filings are clean. One evening covers it, and we treat the result as one more fact about our plan, not a verdict on it.
Some years that exercise nudges us toward “decide sooner.” Keeping the card past year eight isn’t wrong, plenty of people do it with open eyes, but it has carrying costs of its own. That trade deserves its own post, and it’s next on my list for this series.
FAQ
If I give up my green card before hitting 8 years, do I escape IRC 877A entirely?
Generally yes. Under 8 of the last 15 tax years, you’re not a long-term resident, so the exit tax regime doesn’t reach you. Count carefully, though, because partial years count as whole years, and verify your own tally before betting anything on it.
Is the $910,000 exclusion per couple?
Per person, and only covered expatriates ever need it. Each spouse’s assets, gains, and covered status are evaluated separately, which is one reason how assets are titled between spouses shows up in every serious planning conversation.
Does the exit tax hit my 401(k)?
Not through the deemed sale. A typical 401(k) becomes eligible deferred compensation: you keep the account, and future distributions carry 30% withholding with no treaty relief. IRAs are harsher, treated as fully distributed the day before you expatriate. We’re publishing a separate post on how 401(k)s work in a mixed-nationality marriage, before expatriation ever enters the picture.
I’ve heard some people are exempt even if they’re wealthy. True?
A narrow exception exists for certain people who were dual citizens from birth, and for some who expatriate before age 18½. It’s an exception to covered status for citizens renouncing, with strict conditions. There’s no equivalent carve-out for green card holders.
If you’re years away from any of this, your one action today is small: write down how many of the last 15 tax years included a green card, and what your unrealized gains look like per spouse. The exit tax rewards nothing so much as knowing your own numbers early.
This article is general information about US tax rules, not tax or legal advice. Expatriation tax is a specialist area where individual facts change outcomes completely. Please talk to a qualified cross-border tax professional before making any decisions, and see our Disclaimer for details.