Renouncing US Citizenship: The Exit Tax, Form 8854, and What It Actually Costs

Renouncing US citizenship ends the obligation to file US tax returns, but the process itself creates a final tax event. The IRS treats renunciation as a deemed sale of your worldwide assets on the day before you give up your citizenship, and if you qualify as a “covered expatriate” under IRC 877A, you owe tax on the unrealized gain above an exclusion amount ($866,000 for 2024, indexed annually). This is the exit tax. It applies even if you do not actually sell anything, and it applies to assets in every country, not just the US. The filing vehicle is Form 8854, due with your final US return for the year of expatriation.

What makes you a covered expatriate?

IRC 877A(g)(1) defines a covered expatriate as any US citizen who meets any one of three tests. You only need to trip one.

• The income tax test. Your average annual net income tax liability for the 5 tax years ending before the date of expatriation exceeds an inflation-adjusted threshold ($190,000 for 2024). This is the tax you actually paid, not your income. A US citizen in Canada who earns $300,000 but offsets most of the US liability with foreign tax credits may not meet this test, because the net US tax paid after credits is what counts.
• The net worth test. Your net worth on the date of expatriation is $2 million or more. Net worth includes everything worldwide: your Canadian home, RRSP, TFSA, non-registered investments, business interests, and US assets. At current Canadian real estate values, a homeowner in Toronto or Vancouver with retirement savings can reach $2 million without any extraordinary wealth. This is the test that catches most people.
• The compliance test. You cannot certify on Form 8854 that you have been in compliance with all US federal tax obligations for the 5 tax years preceding expatriation. If you have unfiled returns, unfiled FBARs, or unfiled information returns (Form 5471, 3520, 8938), you fail this test regardless of your income or net worth. This is why the catch-up filing, typically through the Streamlined Foreign Offshore Procedures, must happen before renunciation, not after.

If you meet none of the three tests, you are a non-covered expatriate. You still file Form 8854, but the exit tax does not apply. Your post-expatriation income from US sources is taxed under the normal non-resident rules, not the punitive regime.

How does the exit tax work?

The exit tax under IRC 877A(a) treats you as having sold your entire worldwide estate for fair market value on the day before your expatriation date. The gain on each asset is computed as if you sold it at that price, and the aggregate net gain is reduced by the exclusion amount ($866,000 for 2024, adjusted annually for inflation under IRC 877A(a)(3)). You pay US income tax on the excess at the rates that would have applied to an actual sale: ordinary income rates for short-term or ordinary-income property, capital gains rates for long-term capital gains.

The key mechanics:

• The exclusion is allocated. If you have both gains and losses across your worldwide portfolio, the $866,000 exclusion is allocated proportionally across net gain assets under IRC 877A(a)(3)(B). You do not get to apply the entire exclusion to your highest-rate gains.
• Canadian departure tax does not offset it. If you left Canada before renouncing (or are leaving at the same time), Canada’s departure tax under ITA 128.1(4) also deems a sale of your assets on departure. The two deemed dispositions are independent events, and the foreign tax credit mechanics for coordinating them are limited. The treaty does not contain a specific provision for expatriation tax coordination.
• Your home is included. The IRC 121 exclusion ($250,000/$500,000 for a primary residence) can apply to the deemed sale of your home, but only if you meet the 2-of-5-year use and ownership test as of the deemed sale date. If you have been living in Canada and your US home has been rented or vacant, the exclusion may not apply.
• Currency matters. For Canadian-dollar assets, the gain is computed in US dollars using the exchange rate on the deemed sale date. A Canadian home that has not appreciated in CAD terms may still show a USD gain if the exchange rate has moved.

What happens to retirement accounts?

Retirement accounts are carved out of the mark-to-market regime and taxed under their own rules in IRC 877A(d).

• Specified tax-deferred accounts (401(k), traditional IRA, Roth IRA). These are treated as if you received a complete distribution on the day before expatriation. For a traditional 401(k) or IRA, the entire balance is taxable as ordinary income. For a Roth IRA, only the earnings portion is taxable (contributions were already taxed). This is a deemed distribution, not an actual one, so the funds stay in the account, but you owe the tax as if you withdrew everything.
• Canadian retirement accounts (RRSP, RRIF). The IRS treats these as specified tax-deferred accounts if you elected treaty deferral under Article XVIII(7). The deemed distribution rule applies: the entire balance is included in income on your final return. If you did not make the treaty election (meaning the IRS has been taxing the growth annually), only the portion not previously included is taxed.
• Pensions and deferred compensation. Amounts from employer pensions, Social Security, CPP, and other deferred compensation are subject to a flat 30% withholding on each payment after expatriation, with no treaty reduction available. The covered-expatriate 30% rate under IRC 877A(d)(1) overrides the normal 15% treaty withholding. This continues for as long as the payments continue.

What is Form 8854 and when is it due?

Form 8854 (Initial and Annual Expatriation Statement) is the IRS form that reports your expatriation. It has two purposes: it determines whether you are a covered expatriate, and if you are, it calculates the exit tax.

• When it’s due. The initial Form 8854 is due with your final US tax return, which covers the period from January 1 through the day before your expatriation date. For a calendar-year taxpayer who renounces on June 15, the final 1040 covers January 1 through June 14, and Form 8854 is attached. The return is due by the following April 15 (or June 15 with the automatic 2-month extension for taxpayers abroad, or October 15 with a filed extension).
• What it requires. The form requires a complete balance sheet of your worldwide assets at fair market value, including assets in every country and in every account type. For Canadian residents, this means valuing your home (an appraisal or a CRA-accepted valuation), your RRSP/RRIF/TFSA balances, your non-registered investment accounts, any business interests, and any other property with a fair market value. The balance sheet is how the IRS determines whether you meet the $2 million net worth test and calculates the exit tax.

If you fail to file Form 8854, you are automatically treated as a covered expatriate regardless of whether you would have met any of the three tests. Filing is not optional.

What should I do before renouncing?

The sequence matters, and getting it wrong is expensive. There are six steps to work through, starting with catching up on any unfiled returns and ending with the final return itself.

• Step 1: Catch up on unfiled returns. If you have unfiled US tax returns or unfiled FBARs, file them first. The Streamlined Foreign Offshore Procedures require 3 years of income tax returns and 6 years of FBARs. You must be in compliance before you can certify compliance on Form 8854. Renouncing while non-compliant guarantees covered-expatriate status under the compliance test, regardless of your income or net worth.
• Step 2: Evaluate your net worth. If your worldwide net worth is under $2 million and your average US tax liability is under the threshold and you will be in full compliance, you are likely a non-covered expatriate. The exit tax does not apply, and the process is straightforward. If you are over $2 million, you need to model the exit tax.
• Step 3: Model the exit tax. The exit tax is a function of your unrealized gains, not your net worth. A person worth $3 million whose cost basis in their assets is $2.8 million has only $200,000 of unrealized gain, which is well under the $866,000 exclusion. A person worth $2.5 million whose cost basis is $500,000 has $2 million of unrealized gain, and the exit tax will apply to $1,134,000 of it ($2,000,000 minus $866,000). The modeling exercise determines whether the exit tax is negligible or substantial.
• Step 4: Consider timing. If you are planning to sell appreciated assets anyway (a home, a business), selling before renouncing and paying tax on the actual gain may produce a better result than the deemed sale under the exit tax, because you can control the timing and potentially use losses or other offsets. If you hold assets with losses, the deemed sale under IRC 877A allows you to recognize those losses, which offset gains in the exit tax calculation.
• Step 5: Renounce. The renunciation itself happens at a US consulate or embassy. The State Department fee is $2,350. After the oath of renunciation, the consulate issues a Certificate of Loss of Nationality (CLN), and your expatriation date is set. The IRS uses this date to determine the deemed sale date and the end of your US filing obligations.
• Step 6: File the final return. Your final 1040 covers January 1 through the day before expatriation. Form 8854 is attached. Any exit tax is due with the return. After this filing, you have no further US income tax obligations on non-US-source income, though the 30% withholding on deferred compensation continues if you are a covered expatriate.

What about accidental Americans?

Accidental Americans, those who acquired US citizenship at birth through a parent but have never lived in the US, face the same exit tax regime. The difference is that they are almost always non-compliant (having never filed US returns), which means they will fail the compliance test and be treated as covered expatriates unless they catch up first.

• The practical path. File through the Streamlined Foreign Offshore Procedures (zero-penalty for those who qualify as non-resident), get into compliance, then renounce. The alternative is renouncing while non-compliant and accepting covered-expatriate status, but this triggers the exit tax and the punitive 30% withholding on any future US-source income (pensions, Social Security, investment income from US assets).
• The FATCA angle. For accidental Americans whose banks have closed their accounts under FATCA, the urgency is real: the streamlined filing is the fastest path to an SSN or ITIN, which is the document the bank needs to reopen the account or issue a W-9.

Does the exit tax apply to Canadian assets?

Yes. The exit tax is a US tax on your worldwide unrealized gains, regardless of where the assets are located. Your Canadian home, your RRSP, your TFSA, your Canadian brokerage account, your interest in a Canadian business: all are included in the deemed sale calculation.

• Staying in Canada. This creates a potential double-taxation problem for anyone who is also a Canadian resident at the time of renunciation. Canada’s departure tax deems a sale of your assets when you cease to be a Canadian resident, but if you are renouncing US citizenship while remaining a Canadian resident (the more common scenario for accidental Americans), Canada’s departure tax does not apply. The US exit tax stands alone, and you cannot claim a Canadian foreign tax credit for US exit tax paid on Canadian assets because Canada does not recognize the deemed sale.
• Leaving Canada too. If you are leaving Canada and renouncing US citizenship at the same time (moving to a third country), both the Canadian departure tax and the US exit tax apply independently. The treaty does not coordinate them. The total tax can exceed what either country would have charged on its own.

What happens after renunciation?

Once the CLN is issued and Form 8854 is filed, your US tax obligations change permanently:

• You no longer file US income tax returns, FBARs, or Form 8938.
• US-source income (dividends, rental income, capital gains on US real property) is taxed under the normal non-resident rules, with treaty benefits available if you are not a covered expatriate. Covered expatriates lose treaty benefits on certain income categories under IRC 877A(d).
• The 30% withholding on deferred compensation (pensions, annuities, Social Security) applies for life if you are a covered expatriate.
• The IRS publishes your name in the Federal Register’s quarterly list of individuals who renounced citizenship. This is public.
• You enter the US on a foreign passport, not a US passport. If you are Canadian, you travel visa-free under the ESTA or B-1/B-2 but are limited to 6 months per visit and cannot work.

The renunciation is irrevocable. There is no mechanism to restore US citizenship once the CLN is issued and the final return is filed.

• Streamlined Foreign Offshore Procedures, the zero-penalty catch-up for non-residents
• Accidental American: what to do, the four fact patterns and the fix
• FATCA and bank account closures, why banks close accounts and how to reopen them
• Canadian departure tax, the Canadian side of the deemed-sale equation
• Haven’t filed US taxes in years, the five programs compared
• Streamlined vs voluntary disclosure, the willfulness line

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.