Expatriation Tax and Estate Planning: Sections 877A and 2801

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Who this page is for: cross-border families in California, including citizens thinking about giving up citizenship, green card holders whose cards span close to eight tax years and who may leave, their children and heirs in the United States, and families about to move to California from abroad. The expatriation tests start at a $2 million net worth, so the rules reach well below the $15 million federal estate tax exemption, and the gift and bequest tax on the other end has no exemption at all beyond the annual exclusion.

What a renunciation costs a California founder and the founder’s daughter

Take Lee, single and a citizen of the United States, who renounces in 2026 holding stock worth $30 million with a $5 million basis and a traditional IRA of $2 million. Lee plans to give $5 million to a daughter who stays in California. All figures are invented, and income tax rates on the gain are left out because they depend on the rest of Lee’s return.

The exit tax treats Lee as having sold the stock the day before renouncing, and $24.09 million of gain lands on Lee’s return after the $910,000 exclusion. The IRA is treated as fully distributed the day before renouncing too. The gift is a second bill, and it falls on the daughter. Once Lee is a covered expatriate, the $5 million is a covered gift, and she pays 40 percent on everything above the annual amount.

The deemed sale is priced the day before the expatriation date, and a gift made after it is taxed to the person who receives it. The same $5 million gift from a parent who stayed a citizen would use $5 million of the parent’s $15 million basic exclusion and cost no gift tax (Rev. Proc. 2025-32, § 2.14). From a covered expatriate it costs the daughter nearly $2 million.

A missing form can make you a covered expatriate whatever you are worth

Giving up a green card before its 8th tax year can work, because the exit tax applies only to a long-term resident. A long-term resident is a green card holder in at least 8 of the 15 tax years ending with the year the status ends, not counting years treated as a resident of another country under a treaty (§ 877(e)(2)). The test counts tax years in which the person held the card, not years elapsed. A citizen who renounces is an expatriate from the start (§ 877A(g)(2)).

Once someone is an expatriate, meeting any one of three tests on the expatriation date makes them “covered,” and one of the three has nothing to do with wealth (§ 877A(g)(1)(A), cross-referencing § 877(a)(2)):

• Tax liability test. Average annual net income tax for the five tax years before expatriation of more than $211,000 for 2026 (Rev. Proc. 2025-32, § 4.37). The statute’s $124,000 figure is the unindexed base amount.
• Net worth test. Net worth of $2 million or more. This number isn’t indexed for inflation.
• Certification test. Failing “to certify under penalty of perjury that he has met the requirements of this title for the 5 preceding taxable years.” Certification is made on Form 8854.

Two narrow exceptions help people who left the United States young or who held dual citizenship from birth, but neither rescues anyone who fails the certification test (§ 877A(g)(1)(B)). One covers people who were dual citizens at birth, are still citizens of and taxed as residents of the other country, and were U.S. residents for no more than 10 of the last 15 tax years. The other covers people who relinquish citizenship before age 18½ and were U.S. residents for no more than 10 tax years before then.

The expatriation date is the date everything above is measured from. For a citizen it is the earliest of renouncing before a U.S. consular officer, delivering a signed statement of voluntary relinquishment to the State Department, the State Department’s issuing a certificate of loss of nationality, or a court’s canceling a naturalization certificate (§ 877A(g)(3), (4)).

The certification test is the one that catches modest estates, because failing to certify makes the person a covered expatriate regardless of wealth. Form 8854, the Initial and Annual Expatriation Statement, is where the five-year compliance certification is made. It’s filed with the income tax return for the year that includes the expatriation date, and annually after that by anyone who deferred tax or has eligible deferred compensation or nongrantor trust interests (Instructions for Form 8854). A person who doesn’t file it, or files it incomplete or wrong, owes “a penalty of $10,000 for that year, unless it is shown that such failure is due to reasonable cause and not willful neglect” (Instructions for Form 8854 (2025)).

A missing Form 8854 was enough to make a taxpayer covered in Topsnik v. Commissioner, 146 T.C. 1 (2016). A German citizen who had held a green card since 1977 formally abandoned it in 2010 but never filed Form 8854 or certified five years of compliance, and he claimed German residency under the U.S.-Germany treaty. The Tax Court found he wasn’t taxed as a German resident and rejected the claim. It held he was a covered expatriate on the certification test alone and taxed the deemed sale of his remaining installment note.

The deemed sale prices everything the day before you leave

The deemed sale taxes the gain on everything you own, whether or not you sell any of it. The expatriation tax is a one-time income tax on that unrealized gain. Under IRC § 877A(a)(1), “all property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.”

Only the first $910,000 of net gain escapes the tax, and the rest is taxed at your federal income tax rates for the year. Losses count to the extent the Code otherwise allows them, and the wash sale rule doesn’t apply. The gain is taken into account in the year of the deemed sale, and the net gain is reduced by an inflation-adjusted exclusion (§ 877A(a)(2), (3)), which is $910,000 for 2026 (Rev. Proc. 2025-32, § 4.38). The tax applies to people who expatriated on or after June 17, 2008, when the HEART Act added § 877A and § 2801.

Retirement accounts, deferred pay and trust interests come out of the deemed sale and are handled under their own rules (§ 877A(c)):

• Eligible deferred compensation. If the payor is a U.S. person (or elects to act like one) and the expatriate notifies the payor and waives treaty reductions, the payor withholds 30 percent of each taxable payment instead (§ 877A(d)).
• Other deferred compensation. The present value of the accrued benefit is treated as received the day before expatriation, with no early distribution tax. Deferred pay attributable to services performed outside the United States while the person wasn’t a citizen or resident is excluded from both rules (§ 877A(d)).
• Specified tax-deferred accounts. IRAs (other than SEP and SIMPLE arrangements), 529 plans, ABLE accounts, Coverdell accounts, HSAs and Archer MSAs are treated as fully distributed the day before expatriation, again with no early distribution tax (§ 877A(e)). Lee’s $2 million IRA falls under this rule.
• Interests in nongrantor trusts. The trustee withholds 30 percent of the taxable portion of each later distribution to the covered expatriate, and the trust recognizes gain if it distributes appreciated property (§ 877A(f)).

The tax on the deemed sale can be deferred, at a cost

The deemed-sale tax can be put off, but the deferral costs security, a treaty waiver and interest. A covered expatriate may elect to defer the tax on any property until the return is due for the year the property is disposed of, but not past death. The election requires adequate security such as a bond, an irrevocable waiver of treaty rights that would block collection, and interest runs from the original due date (§ 877A(b)).

After you leave, your U.S. children pay 40 percent on what you give them

What a covered expatriate gives or leaves to a U.S. citizen or resident is taxed to the recipient at the highest federal estate or gift tax rate, now 40 percent, after an annual exclusion of $19,000 for 2026, with no $15 million exemption behind it. The recipient pays, so the cost lands on the children: “The tax imposed by subsection (a) on any covered gift or bequest shall be paid by the person receiving such gift or bequest” (§ 2801(b)). The statute calls it a “covered gift or bequest” (IRC § 2801(a), (c); § 2001(c); Rev. Proc. 2025-32, § 4.42(3)).

A parent who expects to expatriate while the children stay in the United States should make the gifts first. Before the expatriation date, ordinary gift tax rules and the parent’s own exemption still apply. After it, the children inherit at a 40 percent tax rate with no $15 million exemption. See our 2026 gift tax guide.

A covered expatriate can keep a transfer outside the tax by showing it on a timely filed gift or estate tax return of the United States, or by making it in a form that would qualify for the marital or charitable deduction if the donor were a U.S. person (§ 2801(e)(2), (3)). Everything else is covered: property acquired by gift from someone who is a covered expatriate at the time, and property acquired by reason of the death of someone who was a covered expatriate immediately before death (§ 2801(e)(1)). The tax is reduced by gift or estate tax paid to a foreign country on the same transfer (§ 2801(d)).

Giving through a trust changes who pays and when. A domestic trust that receives a covered gift pays the tax itself. A gift to a foreign trust is taxed when the trust distributes to a U.S. citizen or resident, unless the foreign trust elects to be treated as domestic (§ 2801(e)(4)).

Treasury issued final regulations under § 2801 in T.D. 10027, published at 90 FR 3376 and effective January 14, 2025. The regulations apply “to covered gifts or covered bequests received on or after January 1, 2025” (Treas. Reg. § 28.2801-1(b)). The recipient reports the tax on Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates, generally due on the 15th day of the 18th month after the end of the year the gift or bequest is received, with a later date for some bequests (Treas. Reg. § 28.6071-1(a)(1)) (Federal Register, Jan. 14, 2025). The Form 8854 instructions add that a former citizen or long-term resident who gives to a U.S. citizen or resident is “presumed to be a covered expatriate for purposes of the section 2801 tax” unless they authorize disclosure of the relevant tax return information.

Families arriving from abroad carry their basis and their foreign trusts with them

A family moving to California from abroad faces two tax systems at once. Federal income tax reaches worldwide income once U.S. residency starts, and California income tax reaches all income from the day California residency starts.

Families often look at whether to realize gains before residency begins, because gain that built up abroad is taxed when the asset is sold after arrival. The Code doesn’t step basis up to fair market value when someone becomes a U.S. resident. Whether to realize gains first turns on the tax rules of the country they’re leaving and needs advice there as well. The one exception ties arrival to the exit tax. Property a covered expatriate held on the date they first became a U.S. resident is treated as having a basis of no less than its fair market value on that date, “solely for purposes of determining any tax imposed by reason of” the deemed sale, unless they elect out (§ 877A(h)(2)). That rule doesn’t reset basis for any other purpose, so an immigrant who assumes arrival gives a step-up is wrong for everything but the exit tax.

A foreign trust set up shortly before the move can end up taxed to the family as a grantor trust. A nonresident who becomes a U.S. resident within five years after transferring property to a foreign trust is treated as having transferred it on the residency starting date, which can make the trust a grantor trust taxed to them if it has a U.S. beneficiary (IRC § 679(a)(4)).

Missing a report on a foreign trust or a foreign gift is expensive. U.S. persons file Form 3520 for transactions with foreign trusts and for gifts or bequests of more than $100,000 from a nonresident alien individual or foreign estate (Instructions for Form 3520). For 2026, the reporting threshold for gifts from foreign corporations and partnerships is $20,573 (Rev. Proc. 2025-32, § 4.47). Failing to report a foreign trust transfer or distribution costs the greater of $10,000 or 35 percent of the gross reportable amount, and the greater of $10,000 or 5 percent of the U.S. owner’s share of trust assets for a missing Form 3520-A (IRC § 6677; Instructions for Form 3520). An unreported foreign gift costs 5 percent of its value for each month the failure continues, up to 25 percent (§ 6039F(c)). Both penalties are excused for reasonable cause.

Owning the trust gives no break on the penalty. In Wilson v. United States, 6 F.4th 432 (2d Cir. 2021), the owner and sole beneficiary of a foreign trust reported a $9.2 million distribution late, and the IRS assessed a 35 percent penalty of $3,221,183. The taxpayer won in district court, and the Second Circuit reversed, rejecting the argument that only the 5 percent owner’s penalty applied.

A treaty won’t help on the California return. “Tax treaties between the United States and other countries which expressly limit their application to federal income taxes do not apply to California” (FTB Pub. 1031, section K).

A spouse who isn’t a U.S. citizen changes the estate plan and the gifts between spouses. No marital deduction is allowed for property passing to a surviving spouse who isn’t a U.S. citizen unless it passes in a qualified domestic trust (QDOT), and no gift tax marital deduction is allowed for gifts to a non-citizen spouse (IRC §§ 2056(d), 2523(i)). For 2026, gifts of up to $194,000 a year to a non-citizen spouse are excluded instead (Rev. Proc. 2025-32, § 4.42(2)). See non-citizen spouses and the QDOT rule and estate planning for non-citizens in California.

California adds income tax on top and no exit tax of its own

California adds no exit tax, but a Californian who leaves still faces the residency and sourcing rules for the year of the move. Current California law has no tax on leaving the state and no state counterpart to § 877A’s deemed sale on giving up citizenship or a green card. Whether California income tax reaches the federal § 877A deemed-sale gain of someone who is still a California resident the day before expatriation is a conformity question to work through with the CPA before the expatriation date. Leaving California first and expatriating later changes the analysis. See leaving California first.

California’s top 2025 bracket is 12.3 percent, plus 1 percent over $1 million (Rev. & Tax. Code, § 17043), and “California does not have a lower rate for capital gains.”

The children’s bill is federal only, because California has no counterpart to § 2801: “Neither the state nor any political subdivision of the state shall impose any gift, inheritance, succession, legacy, income, or estate tax, or any other tax, on gifts or on the estate or inheritance of any person” (Rev. & Tax. Code, § 13301, enacted by Prop 6 in 1982). See California estate tax in 2026.

Community property’s double step-up depends on a condition that needs checking when a spouse isn’t a U.S. citizen or resident. Both halves get a new basis at the first death if at least half of the whole community interest was includible in the decedent’s gross estate (IRC § 1014(b)(6)). See community property and the step-up.

Working with Ridley Law

Expatriation and immigration planning have to be timed around the family’s assets, residency and heirs, and the U.S. estate plan has to be built for whoever stays. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts. The first call is free, runs 30 minutes, and can be by phone or Zoom.

Book my 30-minute call or call 805-244-5291. For the wider planning picture, see high-net-worth estate planning in California.

Frequently asked questions

How much is the expatriation tax?

It’s federal income tax on the gain from a deemed sale of everything you own at fair market value the day before you expatriate, after a 2026 exclusion of $910,000. There’s no separate rate. IRAs and some deferred pay are treated as paid out in full the same day.

Who counts as a covered expatriate?

A citizen who renounces, or a green card holder of 8 of the last 15 years who gives it up, who has a net worth of $2 million or more, average annual income tax over $211,000 for the prior five years (2026 figure), or can’t certify five years of tax compliance on Form 8854.

Does giving up a green card trigger the exit tax?

Only for a long-term resident, meaning someone who held a green card in at least 8 of the 15 tax years ending with the year it ends, and only if one of the covered expatriate tests is met.

What is the section 2801 tax?

A tax paid by a U.S. citizen or resident who receives a gift or inheritance from a covered expatriate, at the top estate and gift tax rate of 40 percent, on the amount above $19,000 a year for 2026. Final regulations apply to gifts and bequests received on or after January 1, 2025.

Does California have an exit tax or tax on gifts from expatriates?

No. California has no exit tax, and state law bars any gift, inheritance or estate tax (Rev. & Tax. Code, § 13301).

Do I get a basis step-up when I move to the United States?

Not in general. The only fair-market-value basis rule tied to arrival is in § 877A(h)(2), and it applies only in computing the exit tax if you later expatriate as a covered expatriate. Gains built up before the move are taxed when the asset is sold.

What are the penalties for not filing Form 3520?

For foreign trust transactions, the greater of $10,000 or 35 percent of the amount involved (5 percent of trust assets for a missing Form 3520-A). For unreported foreign gifts over the threshold, 5 percent a month up to 25 percent. Reasonable cause can excuse both.