I'm renouncing U.S. citizenship. What is Form 8854 and the exit tax?

Form 8854 ("Initial and Annual Expatriation Statement") must be filed by any U.S. citizen who renounces citizenship or any long-term resident (green card holder for 8 of the last 15 years) who terminates residency. The form serves two purposes: it certifies that you have complied with all U.S. tax obligations for the 5 years preceding expatriation, and it determines whether you are a "covered expatriate" subject to the exit tax. The initial Form 8854 is filed for the year of expatriation and attached to your final Form 1040 (your last year as a U.S. person for tax purposes).

You are a covered expatriate if you meet any one of three tests: (1) Your average annual net income tax liability for the 5 years preceding expatriation exceeds a threshold (adjusted annually for inflation — approximately $190,000 for 2026), (2) Your net worth is $2 million or more on the date of expatriation, or (3) You fail to certify on Form 8854 that you have complied with all federal tax obligations for the 5 preceding years. With a net worth of $1.5 million, you would not trigger the net worth test. However, if you cannot certify full compliance (perhaps you missed filing Form 3520, FBAR, or other international information returns), you could still be a covered expatriate under the third test.

If you are a covered expatriate, the exit tax applies under Section 877A. You are treated as having sold all of your worldwide assets at fair market value on the day before your expatriation date. Any gain on this deemed sale is subject to U.S. tax, with an exclusion amount (adjusted annually for inflation — approximately $866,000 for 2026). So if your total deemed gain exceeds approximately $866,000, you owe U.S. tax on the excess at your applicable capital gains rate. For deferred compensation items (like your Australian superannuation), special rules may apply — these items may be subject to a flat 30% withholding when eventually distributed rather than the mark-to-market deemed sale.

Australian superannuation presents a unique challenge. Under the exit tax regime, deferred compensation from non-U.S. employers and specified tax-deferred accounts (which may include foreign retirement accounts) are treated differently from other assets. Instead of a deemed sale, these items may be subject to a 30% withholding tax on distributions after expatriation. The classification of Australian superannuation under these rules depends on whether it qualifies as an "eligible deferred compensation item" or a "specified tax deferred account" — this is a complex area where professional guidance is essential.

Even after expatriation, if you are a covered expatriate, you may have continuing U.S. tax obligations. Any gifts or bequests you make to U.S. persons may be subject to a special transfer tax (currently at the highest estate and gift tax rate of 40%) paid by the U.S. recipient. This can affect wealth transfers to any U.S.-resident children, relatives, or friends indefinitely. You will also continue to be subject to U.S. tax on U.S.-source income as a nonresident alien, including rental income from U.S. real estate or U.S. business income.