April 14, 2016

By Ephraim Moss, Esq. & Joshua Ashman, CPA

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The Heroes Earnings Assistance and Relief Tax Act of 2008 (the “HEART Act”) dramatically changed the tax consequences associated with renouncing U.S. citizenship in two important ways.  The more well-known change was the introduction of the exit tax, which applies upon the renunciation of citizenship or the termination of long-term permanent residency by a so-called “covered expatriate.”

The second and less well-known change was the introduction of the Section 2801 tax, which applies to gifts and bequests from a covered expatriate.  In this blog, we briefly describe these two tax regimes and outline proposed rules that were recently published by the IRS, which clarify the operation of the Section 2801 tax.


In general, you are considered a “covered expatriate” if any of the following applies:

  • Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than a specified amount that is adjusted for inflation ($160,000 for 2015).
  • Your net worth is $2 million or more on the date of your expatriation or termination of residency.
  • You fail to certify on Form 8854 that you have complied with all U.S. federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency.


The exit tax applies both to covered expatriates who relinquish citizenship and to green card holders who relinquish their green cards (including by taking treaty positions) if they held their green card for a period of 8 years during the last 15 years.

The exit tax is a tax on the built-in appreciation in the expatriate’s property (such as a house), as if the property had been sold for its fair market value on the day before expatriation.  The current maximum capital gains rate is 23.8%, which includes the 20% capital gains tax and the 3.8% net investment income tax.

Exceptions to the exit tax may apply in the case of dual citizens from birth and certain minors who expatriate before the age of 18½.


Section 2801 of the Internal Revenue Code imposes a tax on US citizens or residents who receive gifts or bequests from covered expatriates.  A U.S. recipient of a covered gift or bequest is subject to a tax equal to the value of the covered gift or bequest multiplied by the highest estate tax rate in effect on the date of receipt (the rate is 40% in 2016).

Recognizing that U.S. citizens generally are subject to the U.S. estate tax on their worldwide assets at the time of death, Congress determined that it was appropriate, in the interests of tax equity, to impose the Section 2801 tax on U.S. citizens who receive, from an expatriate, a transfer that would otherwise have escaped U.S. estate and/or gift taxes as a consequence of expatriation.

Recently, the IRS issued proposed (not final) regulations that clarify some of the specifics of the Section 2801 tax.  Among other things, the new rules confirm that the section 2801 tax is a tax on the recipient of the gift or bequest, not the donor or decedent.  The regulations provide that a recipient may submit a request to the IRS, with the consent of the expatriate, to disclose certain return information of the expatriate that may assist the recipient in determining whether the donor or decedent is or was a covered expatriate.  Although the IRS may disclose returns and return information upon request, the IRS will not make determinations of covered expatriate status.  Some have criticized the regulations for leaving this burden of knowledge on the recipient.

The IRS has noted that while Section 2801 is currently effective, the obligation to pay the tax is deferred pending the issuance of final regulations.  They have also noted that taxpayers will be given a reasonable period of time after the final regulations are published to comply with Section 2801.  The IRS intends to issue the Form 708 (the form being developed to report the Section 2801 tax) once the proposed regulations are published as final regulations.

If you are considering renouncing your U.S. citizenship, it is important that you understand the tax consequences before turning in your passport for good.  Our experts at Expat Tax Professionals can help you understand the options available to you based on your particular circumstances.

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