On this page:
- Does “covered expatriate” status only matter for wealthy people?
- What are the net worth and income tax tests people usually focus on?
- Can you be a covered expatriate if you have no assets?
- Does US expatriation tax apply to green card holders too?
- If you have no assets, do you owe US income tax when you expatriate?
- What are the two points where expatriation can trigger US tax?
- What is the Section 2801 tax on covered gifts and bequests?
- Can someone with significant assets still owe no exit income tax?
- Why would a covered expatriate with no assets ever create a future tax bill?
- How much tax could a modest future inheritance trigger?
- How realistic is it that a future heir becomes a US person?
Does “covered expatriate” status only matter for wealthy people?
No. It is easy to assume the US expatriation tax rules only reach the rich, the wealthy, and the private-jet set. The press usually features wealthy renouncers like Tina Turner and Eduardo Saverin, the co-founder of Facebook, which fuels that assumption. But wealth is not the trigger. The rules can reach the poorest former US citizen, and certain long-term green card holders, wherever they live, if they fail the certification requirement in IRC Section 877(a)(2)(C).
What are the net worth and income tax tests people usually focus on?
Most coverage of expatriation focuses on two dollar thresholds. The first is the net worth test of US$2 million. The second is the income tax liability test of roughly US$125,000 of average annual net income tax. A “covered expatriate” is a former US citizen, or long-term green card holder, who on giving up that status either crosses one of those dollar thresholds or fails to certify tax compliance under Section 877(a)(2)(C). Because the headlines fixate on the dollar tests, the certification path is the one people miss.
Can you be a covered expatriate if you have no assets?
Yes. The certification requirement under Section 877(a)(2)(C) applies regardless of wealth. A former US citizen, or certain long-term green card holder, who cannot certify compliance becomes a “covered expatriate” even with almost nothing to their name. This is why the rules can reach so-called Accidental Americans who have spent little or no time in the US. The dollar thresholds are only one way in; failing to certify is another.
Does US expatriation tax apply to green card holders too?
Yes. The expatriation tax rules reach certain long-term lawful permanent residents (green card holders), not only US citizens. When a long-term LPR relinquishes or abandons their green card, the same certification requirement under Section 877(a)(2)(C) applies. A long-term LPR who cannot certify compliance becomes a covered expatriate on the same terms as a citizen who renounces.
If you have no assets, do you owe US income tax when you expatriate?
No. The expatriation income tax runs through a “mark-to-market” regime, which taxes unrealized gains as if you sold everything the day before you leave. With no assets, there are no unrealized gains, no tax base, and so no exit income tax. Even cash produces none. US dollars carry a tax basis equal to their face amount, so there is no unrealized gain on cash to tax.
What are the two points where expatriation can trigger US tax?
There are two. The first is the moment a US citizen or green card holder expatriates, that is, leaves the US tax system. This is the exit tax on unrealized gains, and it produces nothing for a person with no unrealized gains. The second arrives later, when a US person receives a covered gift or bequest from the covered expatriate under IRC Section 2801. That second point can land decades after the expatriation event.
What is the Section 2801 tax on covered gifts and bequests?
IRC Section 2801, enacted in 2008, taxes the US person who receives a gift or bequest from a covered expatriate. The recipient pays effectively 40% of the fair market value of the property received. There are virtually no deductions or exemptions, so the 40% applies to the full value. The gift or bequest can be direct or indirect, for example through a trust. Treasury has a proposed-regulation project underway under Section 2801.
Can someone with significant assets still owe no exit income tax?
Yes. Unrealized gains, not wealth, drive the exit income tax. Compare USC “A” with US$5,000 in total assets and USC “B” with US$15 million of cash in the bank and nothing else. Both owe the same exit income tax: US$0. Cash carries a tax basis equal to its amount, so neither has any unrealized gain to tax. And if neither can satisfy the certification requirement under Section 877(a)(2)(C), both are covered expatriates just the same.
Why would a covered expatriate with no assets ever create a future tax bill?
Because the Section 2801 tax can land long after expatriation, on assets you do not have yet. Two things change over time. You may grow or inherit assets after expatriating, while no longer a US citizen, ending up with far more than you hold today. And people in your life, family or friends, may become US residents even if none are today. Either shift can set up a future covered gift or bequest from you to a US person.
How much tax could a modest future inheritance trigger?
Take USC “A,” who renounces and, 40 years later, leaves a US$120,000 bequest to a daughter who has since moved to the US. Under Section 2801, the daughter would owe more than US$40,000 in tax on that inheritance, roughly 40%, with virtually no deductions or exemptions. That is a heavy burden on a relatively modest inheritance. It is one of several scenarios that show how covered expatriate status can matter over the long run.
How realistic is it that a future heir becomes a US person?
It is common. One family member moves to the US temporarily for work or graduate school, gets married, and decides to stay, even for a while. Often they have children, who are US citizens by birth in the US. A US person is now part of the family tree. A future gift or bequest from a covered expatriate to that person can fall under Section 2801, decades after the expatriation itself.