What Is the 877 Code for the US Exit Tax?

The “877 code” refers to Sections 877 and 877A of the U.S. Internal Revenue Code, which establish the “exit tax” for individuals renouncing their citizenship or surrendering long-term residency. The purpose of this tax is to treat expatriation as a taxable event, allowing the U.S. government to tax the worldwide appreciated assets of these individuals one final time. The provisions apply to both U.S. citizens and certain long-term residents.

Determining Covered Expatriate Status

The exit tax applies only to individuals defined as “covered expatriates.” A person becomes a covered expatriate by meeting any one of three tests on their date of expatriation. This determination is the first step in understanding potential tax liability.

The first of these is a tax liability test. This test is met if an individual’s average annual net income tax liability for the five years preceding the date of expatriation exceeds a specific threshold. For 2025, this amount is $206,000. This figure is indexed for inflation and can change annually.

A second path to becoming a covered expatriate is through the net worth test. This test is met if an individual has a net worth of $2 million or more on the date they expatriate. This calculation requires a comprehensive valuation of all worldwide assets, including personal and investment assets, minus all liabilities. The $2 million threshold is a fixed amount and is not indexed for inflation.

The final test is the certification test. An individual is considered a covered expatriate if they fail to certify, under penalty of perjury, that they have complied with all U.S. federal tax obligations for the five years preceding their expatriation. This certification is made on IRS Form 8854, the Expatriation Statement.

Calculating the Exit Tax

For covered expatriates, the exit tax is calculated using a “mark-to-market” system. This treats most of an individual’s worldwide property as if it were sold for its fair market value on the day before expatriation. This “deemed sale” generates a taxable gain or loss, capturing the unrealized appreciation in assets that occurred while the person was in the U.S. tax system.

A significant feature of the exit tax calculation is a capital gains exclusion amount. For 2025, an individual can exclude the first $890,000 of net capital gains arising from the deemed sale of their assets. This amount is indexed for inflation. Only the net gain that exceeds this exclusion threshold is subject to capital gains tax at the prevailing rates.

Certain types of assets are not subject to the mark-to-market tax but are handled under special rules. These include deferred compensation plans, such as pensions, and specified tax-deferred accounts, like traditional IRAs or 529 plans. For these accounts, the individual is treated as having received a full distribution of the account’s value on the day before expatriation, with the entire amount being subject to ordinary income tax. In some cases, a 30% withholding tax is applied to any future payments made from these plans to the expatriate.

The final tax liability is due on the standard tax filing deadline, typically April 15 of the year following expatriation. The tax rates applied depend on the character of the income, whether it is a long-term capital gain or ordinary income from a deemed distribution.

Completing the Expatriation Statement

The primary compliance document for anyone relinquishing U.S. citizenship or long-term residency is IRS Form 8854, the Initial and Annual Expatriation Statement. This form is mandatory for all expatriating individuals, regardless of whether they meet the covered expatriate tests. The form includes a balance sheet where the individual must list all their worldwide assets and liabilities, valued at fair market value as of the expatriation date. The assets listed must be comprehensive, ranging from cash and stocks to real estate and personal property.

The form also requires an income and tax liability summary for the five tax years preceding expatriation. Taxpayers must report their income and the actual federal income tax paid for each of the five years, taken directly from their previously filed U.S. tax returns. A part of Form 8854 is the certification of tax compliance, where the individual must check a box and sign under penalty of perjury, affirming that they have complied with all federal tax obligations for the preceding five years.

Post-Expatriation Tax Rules

After expatriation and payment of any exit tax, former citizens and residents can still face U.S. tax implications. A primary rule involves a tax on gifts or bequests made by a covered expatriate to U.S. persons.

The tax on “covered gifts and bequests” is not paid by the expatriate but by the U.S. citizen or resident who receives the gift or inheritance. The tax is levied at the highest prevailing federal gift or estate tax rate at the time of the transfer. This makes receiving substantial financial gifts from a covered expatriate a taxable event for the recipient.

Furthermore, expatriation does not necessarily sever all U.S. tax obligations. A former citizen or long-term resident, now classified as a non-resident alien, may still be required to pay U.S. taxes on certain types of U.S.-source income. This can include income from U.S. investments, rental properties located in the U.S., or business activities conducted within the country.