Green Card Exit Tax After the 2026 USCIS Adjustment-of-Status Rule

The exit tax is the common name for the expatriation tax imposed under Internal Revenue Code §877A, which Congress added in 2008 to replace the older §877 regime. The exit tax applies to two groups of taxpayers: U.S. citizens who renounce citizenship, and long-term lawful permanent residents who give up their green card. For our NYC clients, the second group is the relevant one. A long-term resident under §877(e)(2) is anyone who held LPR status in at least 8 of the prior 15 taxable years. Holding the card for any portion of a year counts as a full year for this test. So a green card issued in November 2017 and surrendered in February 2025 hits the eight-year mark in 2024 and crosses the exit tax threshold even though the actual elapsed time is closer to seven years.

The green card exit tax does not apply automatically. It applies only if the long-term resident is a “covered expatriate” under §877A(g)(1). Three tests determine covered status, and meeting any one of them triggers the exit tax. The first is an income tax test: the taxpayer’s average annual net income tax for the five tax years preceding the expatriation year exceeds an inflation-indexed dollar threshold. For 2026, that figure is $211,000 of average federal income tax. The second is a net worth test: the taxpayer’s worldwide net worth on the expatriation date is $2 million or more. The third is a compliance test: the taxpayer fails to certify on Form 8854 that they have complied with all U.S. federal tax obligations for the five tax years preceding the expatriation year. The compliance test is the silent killer in this area.

If the long-term resident is a covered expatriate, the exit tax operates as a mark-to-market on essentially all worldwide property. Section 877A(a)(1) treats the property as sold for fair market value the day before the expatriation date. Gains are recognized and reported. Losses are recognized too, subject to ordinary loss rules. An exclusion under §877A(a)(3) shelters the first chunk of gain — the 2026 figure is $910,000, adjusted annually for inflation. The character of the gain follows what it would have been on an actual sale: long-term capital gains on appreciated stock, ordinary on inventory, §1250 unrecaptured gain on real estate, qualified small business stock treatment if §1202 applies.

A few categories of assets get special treatment outside the mark-to-market regime. Eligible deferred compensation items — which generally means qualified U.S. employer retirement plans like 401(k)s where the payer is a U.S. payer — escape the deemed sale, but the covered expatriate is subject to 30 percent withholding on each distribution after expatriation and forfeits any treaty benefit that would otherwise reduce that rate. Specified tax-deferred accounts — IRAs, HSAs, Archer MSAs, Coverdells, qualified tuition programs — are treated as fully distributed the day before expatriation, taxable as ordinary income, but without the 10 percent early-withdrawal additional tax. Interests in nongrantor trusts are not subject to mark-to-market either, but distributions to a covered expatriate beneficiary after expatriation get withheld on at 30 percent.

The exit tax has been in effect since June 17, 2008. What is new in 2026 is the immigration context. The USCIS policy announced on May 23 will push more taxpayers toward decisions about whether to obtain LPR status, whether to retain it, and whether to abandon it now versus later. The green card exit tax framework doesn’t change in response to the immigration policy. But the population of taxpayers who need to model it carefully just expanded substantially, and the timeline for making decisions just compressed.

One last clarification that catches people out: the green card exit tax does not apply to short-term residents. If you held an LPR for six years and surrender it, you owe no exit tax under §877A regardless of your net worth or income. The eight-year threshold is hard. Counting matters. Reedcorp clients who are approaching the eight-year mark and are considering abandonment should make the decision before crossing the threshold, not after. Timing the I-407 filing across that line can save the entire tax.

Form 8854, Initial and Annual Expatriation Statement, is the IRS form that operationalizes the exit tax. Every covered expatriate files it. Every long-term resident who abandons a green card files it. Many taxpayers who would not otherwise be covered expatriates become covered through failure to file Form 8854 properly. So in practice, the form is the document that determines whether the exit tax applies and how much it costs.

The form has multiple parts and operates as both an initial statement in the year of expatriation and an annual statement for years after. Part I asks for general information — date you became a U.S. citizen or LPR, date of expatriation, citizenship and residence after expatriation, contact information. Part II asks the long-term resident questions: dates the green card was held, treaty positions, whether the taxpayer was a U.S. citizen at any point. Part III is the certification of compliance for the prior five tax years — this is the certification that determines whether you are a covered expatriate under the compliance prong of §877A(g)(1). Part IV is the income and net worth test detail — actual numbers showing whether the income tax threshold or net worth threshold is met. Part V is the balance sheet — a complete listing of worldwide assets and liabilities with fair market values on the day before expatriation. Part VI is the deferred compensation, specified tax-deferred account, and trust interest reporting.

The balance sheet in Part V is the document that determines the exit tax liability for covered expatriates. Every asset gets listed at fair market value the day before expatriation. Real estate at appraised value. Marketable securities at closing price. Closely held business interests at appraised value, supported by a written appraisal that should travel with the form. Retirement accounts at account balance. Foreign accounts at U.S. dollar equivalent. The §877A mark-to-market gain is calculated against the asset’s adjusted basis, with the basis step-up under §877A(h)(2) for taxpayers who became U.S. residents after a certain date. The exit tax exclusion is applied at the consolidated level — $910,000 in 2026 — and the remaining gain flows into Form 1040 schedules for the year of expatriation.

The 5-year compliance certification in Part III is where most clients fail. The taxpayer must certify under penalties of perjury that they have complied with all federal tax obligations for the five tax years preceding the expatriation year. “All federal tax obligations” means more than income tax. It means FBAR (FinCEN 114), Form 8938 if required, Form 5471 for foreign corporation ownership, Form 8865 for foreign partnership ownership, Form 3520 and 3520-A for foreign trusts, and any other international information return that applied. A taxpayer who omitted Form 5471 in 2022 cannot honestly certify compliance and therefore becomes a covered expatriate on the compliance prong, even if income and net worth would not have crossed thresholds.

The penalty for failure to file Form 8854 is severe. Section 6039G imposes a $10,000 penalty for failure to file or for filing an incomplete or inaccurate statement. The penalty applies per year of failure. A taxpayer who abandons a green card in 2023 and never files Form 8854 owes $10,000 for 2023, $10,000 for 2024, and so on until the form is filed or the IRS audits and assesses. More importantly, the default treatment of a non-filer is covered expatriate status. The taxpayer who would not have been a covered expatriate had they timely filed Form 8854 becomes one through the failure, retroactive to the expatriation date.

The exit tax under §877A is computed and reported on Form 8854 in the year of expatriation, and the resulting income flows through to Form 1040 for that year. The tax is due with the Form 1040. There is an election under §877A(b) to defer the tax on specific items if the covered expatriate posts adequate security with the IRS, waives treaty benefits with respect to the deferred items, and meets several other procedural requirements. We have rarely seen the deferral election used because the cash-flow benefit is usually less than the cost of the bond and the administrative complexity. For very large estates with significant illiquid assets — closely held businesses, art collections, private fund interests — the deferral election occasionally pencils out. For most NYC long-term residents we work with, it does not.

One subtle point that matters for ongoing compliance: Form 8854 must be filed every year after expatriation in which the former LPR continues to hold an eligible deferred compensation item, has deferred tax under §877A(b), or holds an interest in certain trusts. The annual filing requirement runs indefinitely for these items. We have seen taxpayers stop filing Form 8854 after the year of expatriation because they assumed it was a one-time form. It is not. Each year of failure to file the annual Form 8854 is a separate $10,000 penalty under §6039G.

No. The exit tax under §877A applies only to U.S. citizens who renounce and to long-term lawful permanent residents who abandon their LPR status. A pending I-485 applicant has not yet been granted lawful permanent residence. Even if the applicant is on an H-1B, L-1, F-1, or O-1 visa, and even if the applicant has been working in the United States for years, the applicant is not an LPR until USCIS issues the green card. So the green card exit tax does not apply to pending I-485 applicants who are forced to depart under the May 23, 2026 USCIS rule. The taxpayer who is forced abroad to complete consular processing is in a different tax bucket: resident alien transitioning to nonresident alien.

That different bucket has its own rules, and many of them are unfavorable. The substantial presence test in §7701(b)(3) determines whether a non-LPR is a U.S. tax resident for the year. The test counts 31 days in the current year and a weighted total of 183 days across three years: all the days in the current year, one-third of the days in the immediately preceding year, and one-sixth of the days in the second preceding year. Full-time professionals working in New York City almost always cross this threshold. So before the USCIS rule, the typical pending I-485 applicant on H-1B is taxed as a full-year U.S. resident on worldwide income.

If the May 23 USCIS rule forces a mid-year departure, the substantial presence test for the year of departure depends on how many days the taxpayer spent in the U.S. before leaving. Spending more than 183 days before departure means the taxpayer is a resident alien for the full year by the math, unless they qualify for the “closer connection exception” under §7701(b)(3)(B), which generally requires being present fewer than 183 days in the current year. The closer connection exception will not help most departures occurring after July 1.

The more common outcome is a dual-status year. Section 7701(b)(2) ends a taxpayer’s U.S. residency period on the residency termination date, which is generally the last day the taxpayer was physically present in the United States during the year, provided the taxpayer is not a U.S. resident at any time during the following calendar year. The taxpayer then files a dual-status return: Form 1040 for the resident portion of the year reporting worldwide income, and Form 1040-NR for the nonresident portion reporting only U.S.-source income and effectively connected income.

Dual-status filing is mechanically inferior to either a full-year resident return or a full-year nonresident return for several reasons. The standard deduction is unavailable. Itemized deductions are restricted to a narrow set tied to U.S.-source income or effectively connected income. Joint filing with a spouse is generally not permitted in the year of switch. Most education credits and child tax credits are unavailable in the same form they would have been on a full-year resident return. Tax brackets apply differently to each portion of the year. The result for a New York-based professional earning $300,000 who departs in August is often $10,000 to $20,000 of additional federal tax versus what a full-year resident return would have produced. The exit tax analog here is to model the dual-status outcome carefully and consider treaty positions.

State residency runs on its own track and does not automatically follow the federal change. New York Tax Law §605(b)(1)(B) defines a statutory resident as any individual who maintains a permanent place of abode in New York for substantially all of the taxable year and spends more than 183 days of the year in New York. A pending I-485 applicant with a Manhattan apartment who spends 184 days in New York before leaving is potentially a statutory resident for full-year NY purposes regardless of the federal dual-status break. The interaction with NYC personal income tax under §1305 of the NY Tax Law adds another layer because NYC residency is generally tied to NY State residency for income tax purposes.

A taxpayer departing under the USCIS rule should also be aware of treaty positions. Some U.S. income tax treaties include “tie-breaker” rules that can override the §7701(b) residency determination and treat the taxpayer as a resident of the treaty country for the period after departure even before the substantial presence days run out. Treaty tie-breaker positions are claimed by filing Form 8833 with the dual-status return. The position has to be supportable — the taxpayer must actually have a permanent home and closer center of vital interests in the treaty country — but for individuals returning to a country of citizenship to consular-process, the tie-breaker case is usually strong.

FBAR and FATCA reporting continues for any period the taxpayer is a U.S. resident. The taxpayer who departs in August files FBAR (FinCEN 114) for the full calendar year if any foreign account exceeded $10,000 at any point during the resident portion of the year. Form 8938 (FATCA) is filed with the dual-status Form 1040 if thresholds are met. Many departing professionals close out U.S. accounts and open new foreign accounts during the transition, which can push them over Form 8938 thresholds for the year of departure. Missing the form is a $10,000 penalty plus potential criminal exposure for willful non-disclosure.

So while the green card exit tax doesn’t reach pending I-485 applicants, the immigration shift creates plenty of other tax exposure that needs careful planning. The work we do for clients in this bucket — modeling the dual-status return, evaluating treaty tie-breaker positions, coordinating with NY state residency planning, and confirming international information return compliance — is the analog of exit tax planning for the pre-LPR cohort. The math is different, the dollar amounts are usually smaller, and the planning levers are different. But the cost of ignoring it is real.

The green card exit tax under §877A has two distinct interactions with closely held business ownership — one for S-corporations and one for partnerships — and the rules don’t line up neatly. Reedcorp’s NYC business owners get hit by both. Here is the structure.

S-corporations. IRC §1361(b)(1)(C) permits S-corporation status only if every shareholder is a U.S. citizen, U.S. resident alien, certain qualifying trusts, or an exempt organization. Nonresident aliens are not eligible shareholders. Holding an S-corp share through a single-member disregarded entity does not change the analysis — the underlying owner has to qualify. So the moment a long-term resident abandons a green card and becomes a nonresident alien, any S-corporation in which the former LPR owns shares risks losing its S election. The same risk attaches to a pending I-485 applicant who departs under the May 23 USCIS rule and breaks the substantial presence test mid-year. The S-corporation needs a qualifying shareholder, and a nonresident alien is not one.

The remediation for an inadvertent termination is §1362(f). The IRS may grant relief if the termination was inadvertent, the corporation and shareholders take steps to restore eligibility within a reasonable time, and the corporation and shareholders agree to be treated as if the termination had never occurred. The relief request runs through Rev. Proc. 2013-30 or, where the facts fall outside the safe harbor, a private letter ruling. PLR fees are $30,000+ as of 2026 inflation adjustment, plus legal fees of $20,000 to $40,000 for the request, plus accounting fees for the corrective filings. We’ve quoted clients $50,000+ all-in for an inadvertent-termination remediation. The interim period — between the date of termination and the date of remediation — is C-corporation taxation, which means double taxation on any distributions and a different state tax footprint that can be substantial in New York. The exit tax planning has to take this exposure into account. We routinely recommend that S-corp shareholders considering expatriation either pre-buy the other shareholders, convert to LLC structure before expatriation, or restructure the ownership through a qualified subchapter S trust ahead of the I-407 filing.

The exit tax mark-to-market under §877A treats the S-corporation stock as sold for fair market value the day before expatriation. The gain over basis is recognized at long-term capital gains rates if the stock was held more than one year, which it generally was. The fair market value of closely held S-corp stock requires a written appraisal. We use the appraisal both for the Form 8854 balance sheet and for the deemed-sale gain computation. Built-in gain at the corporate level under §1374 is not directly relevant to the §877A computation, but it factors into the appraisal because a buyer would discount the stock for embedded corporate-level tax exposure on future appreciated-asset sales.

Partnerships. The rules for partnership interests held by departing taxpayers are more complex and changed significantly under the 2017 tax act. The deemed sale of a partnership interest under §877A operates as a normal §741 sale: the gain is mostly capital, with ordinary character attributed under §751 to the partner’s share of unrealized receivables and inventory items. The exit tax recognizes the §741 capital gain and the §751 ordinary gain in the year of expatriation, taxed at the rates that would have applied to an actual sale.

But for partnerships engaged in a U.S. trade or business, a separate rule under §864(c)(8) treats the gain on sale of the partnership interest as effectively connected income to the extent of the foreign partner’s distributive share of effectively connected gain that would have flowed through if the partnership had sold all its assets. For a covered expatriate selling a partnership interest after the deemed-sale date — for example, an actual sale six months later — §864(c)(8) means the gain is U.S.-taxable in the hands of the former LPR who is now a nonresident alien. Section 1446(f) imposes a 10 percent withholding obligation on the transferee buying the interest, with the partnership itself liable as a backup withholding agent if the transferee fails to withhold.

This trips clients up routinely. A long-term resident abandons LPR status in February 2026, takes the §877A deemed-sale gain into income for 2026, files Form 8854 with the balance sheet showing the partnership interest at $5 million FMV. Eighteen months later, the partnership buys the former LPR out for the same $5 million. The buyer assumes there’s no further tax because the §877A mark-to-market already happened. Wrong. The 2027 buy-out is a separate taxable event for the nonresident-alien former LPR, with §864(c)(8) effectively connected gain treatment to the extent of the partnership’s underlying U.S. trade-or-business assets, plus §1446(f) withholding by the transferee. The partnership becomes an unwilling withholding agent, the former LPR owes additional federal tax, and the timeline gets messy because the foreign tax credit on the home-country side may not align with the U.S. effective dates.

Our exit tax planning for partnership-owning clients always includes a §704(c) and §751 inventory of the partnership’s assets, a §864(c)(8) projection of effectively connected gain on a hypothetical sale, and a written memo to the transferee buyer if a future sale is planned. We coordinate with partnership counsel on amendment of the partnership agreement to permit cleanup withholding mechanics if the partner becomes a nonresident alien. For larger interests — over $10 million in fair market value — we sometimes recommend pre-expatriation restructuring through a check-the-box election that converts the entity into a corporation for U.S. tax purposes, which changes the deemed-sale character and can produce a better overall result depending on the asset mix. None of this is one-size-fits-all. The exit tax interaction with partnership ownership is one of the highest-stakes parts of the planning, and it’s worth getting right.

The smartest exit tax planning starts 12 to 18 months before the expected I-407 filing date. Anything shorter than 12 months limits the planning levers. Anything inside 3 months usually means the client takes the exit tax bill that the current facts produce, which is almost always larger than what proper sequencing would have produced.

Here is the planning sequence we use for Reedcorp clients in this situation, listed roughly in chronological order.

First, a complete personal balance sheet. We list every worldwide asset at fair market value, every liability, and every contingent claim. Real estate gets appraised. Closely held business interests get appraised. Foreign accounts get marked at U.S. dollar equivalent. This gives us the §877A net worth figure that determines whether the client is a covered expatriate, and it gives us the gain inventory for the deemed-sale computation. We always find at least one asset the client forgot about — usually a retirement account from a former employer or a small ownership interest in a friend’s startup. Missing assets on the balance sheet means missing them on Form 8854 and risking the compliance prong of covered-expatriate status.

Second, a 5-year compliance audit. We pull the prior five years of federal income tax returns, FBARs, Forms 8938, Forms 5471, Forms 8865, Forms 3520, and any other international information returns that should have been filed. We confirm every required return was filed timely and accurately. If any were missed, we file delinquent returns under the appropriate procedure — streamlined filing compliance for non-willful taxpayers, delinquent international information return procedures for missed forms with no tax due, or the IRS voluntary disclosure practice if there’s tax due and the omissions were willful. The cleanup has to be complete before the certification on Part III of Form 8854 can be honestly signed.

Third, gift planning. Outright gifts before the expatriation date escape the green card exit tax on the gifted property because the property is no longer in the expatriate’s hands on the deemed-sale date. The U.S. gift tax annual exclusion is $19,000 per donee in 2026, and the lifetime exemption is $15 million for 2026, made permanent and indexed by the OBBBA. Gifts to non-citizen spouses are limited to a $190,000 annual exclusion in 2026 instead of the unlimited marital deduction available between U.S. citizen spouses. Gifts to children, siblings, or other beneficiaries shift property out of the covered expatriate’s estate and reduce the §877A mark-to-market base. There’s a back-end rule under §2801 that imposes tax on the U.S. recipient of a gift or bequest from a covered expatriate, but the rule reaches gifts and bequests after expatriation, not before. Pre-expatriation gifting is one of the most effective planning tools for the green card exit tax, and it’s surprisingly underused because most clients don’t start the planning early enough.

Fourth, retirement account decisions. Specified tax-deferred accounts — IRAs, HSAs, Coverdells — are treated as fully distributed the day before expatriation under §877A(e)(2). For a long-term resident with a large traditional IRA, the deemed distribution creates a six-figure ordinary income event in the year of expatriation. Roth conversion before expatriation, spread over several years if income tax brackets permit, can shift the income recognition into lower-rate years and avoid the lump-sum hit at expatriation. Eligible deferred compensation items — most U.S. 401(k) plans — escape the deemed sale but face 30 percent withholding on each post-expatriation distribution. The covered expatriate forfeits treaty benefits on these items, so a country that has a 15 percent treaty withholding rate for retirement distributions cannot use it. We model alternatives for each retirement plan: leave it as eligible deferred comp, roll to IRA before expatriation (triggering deemed distribution), or partially convert.

Fifth, real estate planning. U.S. real property remains subject to FIRPTA withholding under §1445 on sale by a nonresident alien — 15 percent of the gross sale price withheld by the buyer at closing, refundable on Form 1040-NR if actual tax is less. A long-term resident planning to sell U.S. real estate in connection with expatriation faces a sequencing choice: sell before the deemed-sale date and report the gain on Form 1040 for the resident portion of the year, or hold past expatriation and sell later as a nonresident with FIRPTA withholding. The first option recognizes the gain at potentially lower combined effective rates because long-term capital gains plus NY state and city tax come out near the same total either way, but the first option avoids the FIRPTA cash-flow drag and can be structured to take advantage of installment treatment if seller financing is involved.

Sixth, state residency. New York and California are the two highest-stakes states for outbound moves. NY’s statutory residence test traps clients who don’t carefully break the permanent-place-of-abode test before the year-end of expatriation. We sequence the move out of NYC and out of NY state ahead of the federal expatriation date when possible. A client who establishes Florida domicile in January, sells the NY apartment in March, files for the NY change-of-resident date in March, abandons the green card in June, and files Form 8854 for the federal expatriation has a much cleaner state tax outcome than a client who does all of it on the same day. We coordinate with NY state residency counsel — separate engagement, separate fee — for clients whose NY exposure is significant.

Seventh, the actual I-407 filing and Form 8854 preparation. This is mechanical at the end of well-sequenced planning. The Form I-407 is filed with USCIS to formally abandon LPR status, generally accompanied by surrender of the physical green card. The expatriation date is the date the form is filed and the card returned. Form 8854 is then prepared as part of the year-of-expatriation Form 1040 filing, which is due by the usual April 15 deadline (or June 15 with the automatic extension for taxpayers abroad). The exit tax is reported and paid with that return.

Eighth, post-expatriation compliance. The annual Form 8854 continues as long as the former LPR holds eligible deferred compensation, has deferred tax under §877A(b), or holds interests in certain trusts. Section 2801 imposes tax on the U.S. recipient of any gift or bequest from a covered expatriate, which means the planning conversation continues for the recipient generation. FBAR ends with the year of expatriation because the former LPR is no longer a U.S. person required to file. Foreign tax credit positions on the home-country side need ongoing attention if any U.S.-source income continues — most notably rental income from U.S. real estate, partnership distributive shares of effectively connected income, and pension distributions from U.S. employer plans.

The whole sequence runs about $40,000 to $120,000 in professional fees depending on complexity, asset mix, and the number of jurisdictions involved. The tax savings on a well-sequenced exit tax engagement frequently run to seven figures for clients with $10 million+ net worth. The math favors the planning. The only constraint is the calendar — start late, and the cheapest levers are already gone.