Tax Talk Thursday: Before You Leave — A Deep-Dive Exit Tax Guide for Green Card Holders and Dual Citizens

Tuesday's blog introduced the three covered expatriate tests and the early warning indicators that signal exit tax exposure under IRC Section 877A. If you haven't read that post yet, start there.

This Tax Talk Thursday goes deeper — and it focuses specifically on two groups whose situations are more nuanced, more misunderstood, and frankly more dangerous than the general headlines suggest: long-term green card holders and dual citizens.

Both groups carry unique risks that standard exit tax coverage glosses over. Green card holders can trigger the exit tax without ever setting foot in a consulate. Dual citizens may qualify for a narrow exception — or may be disqualified from it by a single filing mistake made years ago. And in both cases, the difference between a catastrophic tax bill and a clean departure often comes down to decisions made years before the exit date.

Green Card Holders and the 8-of-15 Year Rule

When the Exit Tax Clock Starts — and How Quickly It Runs

Most green card holders assume the exit tax is something that happens to wealthy citizens renouncing passports overseas. That assumption is wrong.

For purposes of IRC Section 877A, a long-term resident is an individual who has held U.S. green card status for any portion of at least 8 of the last 15 tax years — which could be as little as 6 years and 2 days for someone who obtains the green card on December 31 of Year 1 and surrenders it on January 1 of Year 8.

Read that again. 6 years and 2 days of actual green card holding can satisfy the 8-year threshold due to how partial years are counted. Many clients who believe they are years away from the long-term resident threshold are already there — or will be before they've decided what country to move to.

Once you cross the 8-of-15 threshold and abandon your green card, the three covered expatriate tests apply exactly as they do to a renouncing U.S. citizen. There is no lesser standard for permanent residents.

The Only Clock-Stopping Option

For green card holders, it may be possible to expatriate before meeting the long-term resident definition, which applies to individuals who held lawful permanent resident status in at least 8 of the 15 years preceding expatriation. This is the only clean exit from long-term resident status that avoids the exit tax framework entirely — but it requires acting before year 8, not after.

This is a time-sensitive, irreversible decision. If a green card holder is certain they will leave the United States permanently, departing before the 8-year mark eliminates exit tax exposure regardless of net worth. Waiting until year 9 or 10 because the timing felt inconvenient is a choice that can carry a six- or seven-figure price tag.

Three Ways Green Card Holders Trigger Exit Tax Without Intending To

Beyond the standard abandonment filing, green card holders face several paths to an unexpected expatriation event:

1. Filing Form I-407 Without Tax Preparation

To officially abandon a green card, you must file Form I-407 with U.S. Citizenship and Immigration Services. Filing Form I-407 alone isn't enough — you must file the proper tax forms to fully exit the U.S. system and avoid long-term issues. Many green card holders file I-407 without realizing it simultaneously sets their expatriation date and locks in their exit tax calculation. Completing the immigration step first, without coordinating with a tax advisor, leaves no room for adjustment.

2. Administrative or Judicial Revocation

A green card that is revoked — not voluntarily surrendered — can still trigger exit tax consequences if the holder is a long-term resident. The IRS does not provide an exemption because the departure was involuntary.

3. Claiming Treaty Non-Residency as a Long-Term Resident

This is perhaps the most dangerous trap, and it is almost entirely overlooked in mainstream coverage.

If a long-term resident tries to use dual residency tie-breaker rules to claim residency in another country via a tax treaty, the IRS views this as a deemed expatriation. This move can instantly trigger the Section 877A exit tax, treating global assets as if they were sold the day before the taxpayer left.

In other words, a green card holder who files Form 8833 to claim non-resident status under a tax treaty — believing this is simply a routine tax filing — may have just triggered their own exit tax without ever visiting an embassy. In certain instances when an individual is treated as a nonresident alien pursuant to a tiebreaker rule in a relevant tax treaty, it can trigger Section 877A expatriation tax.

For those who have held a green card for fewer than 8 years, claiming treaty non-residency can actually be a shield — it stops the clock on long-term resident status, preventing them from falling into the exit tax trap later. But for those past the 8-year threshold, the same filing triggers the very consequences they may be trying to avoid. This distinction — based entirely on where you are in the 8-of-15 year count — makes the timing of any treaty filing a critical tax planning decision, not a routine compliance choice.

Dual Citizens — The Exception That Isn't as Wide as It Looks

What the Dual Citizen Exception Actually Covers

The IRC Section 877A dual citizen exception gets mentioned often. It gets explained accurately far less often.

The dual citizen exception exempts an individual from covered expatriate status if they became a citizen of the United States and another country at birth, continue to be a citizen of and are taxed as a resident of that other country as of the expatriation date, and have been a U.S. resident for not more than 10 taxable years during the 15-taxable year period ending with the taxable year of expatriation.

Three requirements. All three must be met simultaneously.

"Became a citizen of both countries at birth" This means genuine dual citizenship from birth — not naturalized U.S. citizenship obtained later, and not a second citizenship acquired in adulthood. A person who was born in the United States to foreign national parents and acquired citizenship in their parents' country at birth under that country's laws may qualify. A person who was born abroad, moved to the U.S., and later naturalized does not — regardless of what other citizenship they now hold.

"Continues to be a citizen of and is taxed as a resident of that other country" 

Both conditions must be satisfied on the expatriation date. Being a citizen of the other country is not sufficient. The individual must also be treated as a tax resident of that country. A dual citizen who has lived in the United States for decades with no active tax residency abroad does not satisfy this prong.

"U.S. resident for not more than 10 of the last 15 tax years" 

For purposes of determining U.S. residency under this test, the substantial presence test described in IRS Publication 519 applies. A dual citizen who has lived continuously in the United States for 10 or more of the last 15 years cannot use the exception. For many dual citizens raised here, educated here, and who built their careers here, this threshold is crossed before the question of expatriation ever arises.

The Exception Only Covers Two of the Three Tests

Here is the most important nuance that almost no one explains clearly: even if a dual citizen qualifies for the exception under the net worth test and the tax liability test, the exception does not cover the compliance certification test.

Triggering the certification test is sufficient to create exit tax liability even where the expatriate does not otherwise meet the wealth or income thresholds.

This means that a dual citizen who is fully exempt from the monetary tests — born with dual citizenship, taxed as a resident of their other country, and under the 10-year U.S. residency limit — can still become a covered expatriate if they cannot certify five years of full U.S. tax compliance on Form 8854. For accidental Americans who have never filed U.S. returns, the dual citizen exception does not save them.

The IRS Relief Pathway for Certain Former Citizens

For accidental Americans and others who qualify, there is one structured remediation option: the IRS Relief Procedures for Certain Former Citizens.

These procedures are available only to U.S. citizens with a net worth of less than $2 million at the time of expatriation and at the time of making their submission, and an aggregate tax liability of $25,000 or less for the taxable year of expatriation and the 5 prior years. If these individuals submit the required information and meet all requirements, they will not be treated as covered expatriates under IRC 877A and will not be liable for unpaid taxes and penalties for those years.

These procedures may only be used by taxpayers whose failure to file required returns and pay taxes was due to non-willful conduct.

This is a meaningful pathway for dual citizens with modest assets and genuinely non-willful compliance failures — but it is available only before expatriation is complete and only if all financial thresholds are met. It is not a general amnesty program.

What Actually Gets Taxed — A Closer Look at the Deemed Sale Calculation

The Mark-to-Market Calculation in Practice

Under the IRC 877A mark-to-market regime, all property of a covered expatriate is deemed sold for its fair market value on the day before the expatriation date. Any gain arising from the deemed sale is taken into account for the tax year of the deemed sale. Losses are taken into account to the extent otherwise provided in the Code, except that the wash sale rules of IRC 1091 do not apply.

For calendar year 2025, the exclusion amount is $890,000. Every dollar of net gain above that exclusion is taxed at applicable capital gains rates in the year of expatriation — including the 3.8% Net Investment Income Tax for high-income taxpayers. Losses can offset gains in the calculation, which makes identifying and documenting positions with embedded losses before the expatriation date a meaningful planning step.

Retirement Accounts: The Hidden Tax Bomb

This is where even sophisticated taxpayers are often blindsided.

Covered expatriates cannot defer tax on U.S. retirement accounts. The entire balance of deferred compensation plans — including IRAs, 401(k)s, and defined-benefit pensions — is treated as distributed on the day before expatriation and taxed at ordinary income rates, often 37%. No 10% early withdrawal penalty applies, but no rollover option exists either.

For an individual with $800,000 in a traditional IRA and $400,000 in a 401(k), that is $1.2 million of ordinary income recognized in a single year — on top of any gain from the deemed sale of other assets.

For eligible plans with a U.S. payer and otherwise in applicable compliance, the covered expatriate avoids any deemed distribution on the day before expatriation and instead faces a 30% withholding tax on actual future distributions. This treatment allows the account to continue growing and defers the tax event until distributions are actually taken — still punitive, but meaningfully different from a full deemed distribution in the year of departure.

The distinction between specified tax-deferred accounts (IRAs, Roth IRAs) and eligible deferred compensation plans (certain 401(k)s, pensions) determines which treatment applies and is highly fact-specific based on the plan's U.S. payer status. This is not a determination to make without professional guidance.

The Deferral Election: A Cash Flow Tool, Not a Tax Reduction

Under IRC Section 877A(b), a covered expatriate may elect to defer payment of the mark-to-market tax until the property is actually sold or gifted, or the covered expatriate dies. This election is irrevocable, and during the election period, interest accrues at the statutory underpayment rate — currently 8% — compounded daily from the unextended due date of the return for the year of expatriation.

The deferral election requires providing adequate security as collateral and irrevocably waiving any treaty benefits that would otherwise preclude collection. It is a tool for managing cash flow when the deemed sale creates a liability that cannot be funded without liquidating the very asset being taxed — such as a closely-held business or illiquid real estate. It does not reduce what is ultimately owed.

A Pre-Expatriation Planning Roadmap

For green card holders and dual citizens genuinely considering a permanent departure, here is the decision sequence that should guide planning — ideally beginning two to five years before the intended expatriation date.

Step 1: Confirm Your Status 

Before any planning begins, confirm with certainty whether you are a U.S. citizen, a long-term resident, a dual citizen from birth, or some combination. There have been many situations where clients thought they were U.S. taxpayers but, upon further consultation with immigration counsel, were determined not to be. Incorrect assumptions at this stage lead to planning that is either unnecessary or dangerously inadequate.

Step 2: Count Your Years (Green Card Holders)

Determine precisely how many of the last 15 tax years you have been a lawful permanent resident. If you are at six or seven years and certain you will leave permanently, the decision of whether to depart before or after year eight carries major financial consequences. Account carefully for partial years.

Step 3: Conduct a Global Net Worth Analysis 

Calculate the fair market value of every worldwide asset — U.S. and foreign real estate, investment accounts, retirement accounts, closely-held business interests, cryptocurrency, collectibles, and foreign financial accounts. Calculate your tax basis in each. The difference is your embedded gain. Compare your total net worth to the $2 million threshold and your total embedded gain to the $890,000 exclusion.

Step 4: Run the Five-Year Tax Liability Average 

Pull your federal income tax returns for the five years preceding your intended expatriation year. Calculate the actual net tax liability for each year and compute the five-year average. If you are approaching or exceeding the 2025 threshold of $206,000, evaluate whether income smoothing strategies — timing large transactions, managing pass-through distributions, or harvesting losses — can reduce the average before your departure date.

Step 5: Conduct a Full Compliance Audit 

Confirm that all of the following have been filed accurately for the past five years: federal income tax returns, FBAR (FinCEN 114), Form 8938, Form 5471, Form 8865, Form 3520 and 3520-A, Form 5472, and any other applicable international information returns. If gaps exist, evaluate remediation options — including the Streamlined Filing Compliance Procedures — before the expatriation date.

Step 6: Evaluate Net Worth Reduction Strategies 

If your net worth approaches or exceeds $2 million, consider whether pre-expatriation gifting can reduce it below the threshold. The lifetime estate and gift tax exemption is relatively generous at $15 million per individual or $30 million per couple. You can also gift up to $194,000 for 2026 (periodically adjusted for inflation) to a non-citizen spouse without using any unified credit. Gifting appreciated assets requires careful analysis of both gift tax consequences and the recipient's future basis, but can meaningfully reduce net worth when done correctly with adequate lead time.

Step 7: Address Retirement Accounts Strategically 

If you have substantial retirement account balances, evaluate whether beginning distributions prior to expatriation — spreading ordinary income across multiple lower-rate tax years — is more efficient than triggering a full deemed distribution in the year of expatriation. This is a highly fact-specific analysis involving projected income, tax brackets, and retirement timeline.

Step 8: Layer in a California-Specific Analysis 

For clients in Los Angeles, the San Gabriel Valley, or anywhere in California, add a state-level layer. California does not conform to federal exit tax treatment, and the Franchise Tax Board is aggressive on residency determinations. Even after federal expatriation, California-source income — including gains from California real estate — remains subject to California tax. A full exit from the California tax system requires careful attention to residency severance, not just federal filing compliance.

The Window Closes on Your Expatriation Date

Every item in this roadmap — adjusting net worth, smoothing income, remediating compliance gaps, making gifting decisions, electing deferral — must be completed before you take the formal immigration step that sets your expatriation date. Once Form I-407 is filed or citizenship is formally renounced, the calculation is locked.

That is what makes exit tax one of the most consequential — and most unforgiving — areas of U.S. international tax law. The planning window is real. It is finite. And for green card holders approaching year eight, or dual citizens with unresolved compliance histories, that window may already be closing.

At MKHS Tax Group, we help green card holders, dual citizens, and U.S. citizens abroad analyze their exit tax exposure, audit their compliance history, and build a pre-expatriation strategy before it's too late. 📧 info@mkhstaxgroup.com