U.S. EXIT TAX PLANNING FOR
LONG-TERM GREEN CARD HOLDERS WITH A LARGE 401(k)

Form 8854, Covered Expatriate Status, 401(k) Treatment, and Section 2801

By Alex Oware, CPA and Tax Attorney | Updated August 2, 2026

A long-term green card holder can spend decades building retirement savings without realizing that relinquishing the green card may create a separate federal tax regime. The issue becomes especially important when a large employer-sponsored 401(k) pushes worldwide net worth to or above $2 million. The account counts when covered-expatriate status is measured, but it may be taxed differently from a brokerage account, real estate, or a traditional IRA.

This article explains that system through one case study. The analysis follows the legal questions needed to reach a correct result: first classify the taxpayer, then apply the covered-expatriate tests, then classify the assets, and finally evaluate the planning and filing consequences.

Scope. The discussion is limited to U.S. federal taxation. It does not address state tax, foreign-country tax, investment suitability, or immigration advice.

---

The Case Study

Jordan is 63 and has held a U.S. green card continuously since 2015. Jordan plans to retire, relocate abroad, and formally abandon lawful permanent resident status in 2026. Jordan was not a dual citizen at birth, does not qualify for the statutory minor exception, and has never claimed treaty residence in another country while holding the green card.

Jordan owns a $1.3 million employer-sponsored 401(k) maintained by a U.S. plan administrator. Jordan is considering rolling the account into a traditional IRA after retirement. Jordan’s five-year average net U.S. income tax liability is approximately $92,000. The prior five years of federal tax compliance have not yet been independently reviewed.

EXHIBIT 1 Jordan’s Preliminary Worldwide Net Worth

---

The Federal Tax Framework

The expatriation rules operate through a series of classifications. A green card holder must first be a long-term resident. Ending long-term residency then creates an expatriation. The expatriate is covered only if at least one of three statutory tests is failed. If the person is covered, Section 877A does not tax every asset in the same way.

• Ordinary property generally enters the mark-to-market regime.
• Eligible deferred compensation, which may include a qualifying employer 401(k), generally enters a later withholding regime.
• Specified tax-deferred accounts, including traditional IRAs, are generally treated as fully distributed immediately before expatriation.
• Interests in nongrantor trusts follow a separate distribution and withholding regime.

The correct analysis therefore does not begin by calculating an “exit tax.” It begins by determining status. Only after status is known can the 401(k), the possible IRA rollover, other assets, Form 8854, and future family transfers be evaluated correctly.

---

1. Does relinquishing Jordan’s green card fall within the expatriation rules?

Answer. Yes. Jordan is a long-term resident, so terminating lawful permanent residence is an expatriation for federal tax purposes.

A lawful permanent resident becomes a long-term resident after holding that status in at least 8 of the 15 tax years ending with the year residency terminates. A partial year counts. A year is excluded only when the individual is treated as a resident of another country under an income tax treaty, does not waive the treaty benefits available to that resident, and satisfies the required notice rules.

Jordan held a green card in every year from 2015 through 2026. Both 2015 and 2026 count even if Jordan held the status for only part of those years. Jordan therefore has 12 counted years and is a long-term resident. The formal abandonment of the green card is not merely an immigration event; it is also the event that brings Jordan into the federal expatriation framework.

This conclusion does not mean Jordan is automatically a covered expatriate. It only establishes that the covered-expatriate tests must be applied.

---

2. What makes a long-term resident a covered expatriate?

Answer. Failing any one of three tests: the average-tax-liability test, the $2 million net-worth test, or the five-year tax-compliance certification.

For a 2026 expatriation, the average annual net income tax liability for the five tax years ending before expatriation must not exceed $211,000. The worldwide net-worth threshold is $2 million or more and is not indexed for inflation. The compliance test requires the individual to certify on Form 8854 that all federal tax obligations for the five preceding tax years have been satisfied.

EXHIBIT 2 The Three Covered-Expatriate Tests

Jordan passes the tax-liability test. Jordan preliminarily fails the net-worth test. The compliance test remains unresolved and is independent of the other two. Even a taxpayer worth far less than $2 million can become covered solely because the five-year certification cannot be made.

Because the special exceptions for certain dual citizens at birth and certain minors do not apply, Jordan is presently on course to be a covered expatriate unless the balance sheet is legitimately reduced below $2 million and the compliance certification is supported.

---

3. Why does the 401(k) matter twice?

Answer. First, its full value counts toward the $2 million net-worth test. Second, if Jordan is covered, the account may receive a special deferred-compensation treatment rather than the ordinary mark-to-market treatment.

The net-worth test measures worldwide economic interests at fair market value on the expatriation date, reduced by enforceable liabilities. Tax deferral does not remove an asset from the balance sheet. The employer 401(k), U.S. and foreign financial accounts, real estate, private business interests, personal property, and other economic interests must all be considered.

Without the 401(k), Jordan’s preliminary net worth would be $1 million. Including the $1.3 million plan produces the correct $2.3 million figure. The 2026 mark-to-market exclusion of $910,000 does not reduce net worth. That exclusion applies later, and only to net gain on property that is actually subject to the mark-to-market regime.

This is the central distinction in a large-401(k) case: an account can count in full when covered status is measured even though it is not taxed under the same rule as ordinary investment property.

---

4. If Jordan is covered, how are the brokerage account, residence, and other ordinary assets taxed?

Answer. They generally enter the mark-to-market regime and are treated as sold for fair market value on the day before expatriation.

The deemed sale produces gain or loss as though Jordan actually disposed of the property. For 2026, the first $910,000 of net mark-to-market gain is excluded. The exclusion is not a deduction from net worth and is not applied separately to each asset. It is allocated among assets with built-in gain under the statutory and administrative rules.

Assume Jordan’s mark-to-market assets have aggregate built-in gain of $1.1 million. The $910,000 exclusion would leave $190,000 of net gain potentially subject to federal income tax, before applying character rules, loss limitations, and other adjustments. If aggregate built-in gain is below $910,000, Jordan may be a covered expatriate yet owe no immediate mark-to-market tax on those assets.

Long-term residents also have an important basis rule. For property Jordan owned when U.S. residency first began, basis for the mark-to-market calculation is generally not less than the property’s fair market value on that residency-start date, unless Jordan elects otherwise. This rule can prevent the United States from taxing appreciation that arose before Jordan entered the U.S. tax system.

Covered status and immediate exit-tax liability are therefore different questions. Jordan can be covered even when the mark-to-market calculation produces little or no current tax.

---

5. How is the employer-sponsored 401(k) treated if Jordan is covered?

Answer. A qualifying employer plan maintained by a U.S. payor can generally be treated as eligible deferred compensation if Jordan satisfies the notice and treaty-waiver requirements.

Eligible deferred compensation is not treated as fully distributed on the day before expatriation. Instead, the U.S. payor generally withholds 30 percent from each later taxable payment. To obtain that treatment, Jordan must give Form W-8CE to the payor by the applicable deadline and must make an irrevocable waiver of any treaty right that would reduce withholding on the item.

Form W-8CE is delivered to the plan administrator or other payor, not filed directly with the IRS. The general deadline is the earlier of the day before the first post-expatriation distribution or 30 days after expatriation. Jordan should retain the signed form, proof of delivery, plan correspondence, and confirmation that the payor has treated the item as eligible deferred compensation.

If the requirements are not met, the item may be ineligible deferred compensation. In that case, the present value of the accrued benefit can be included in income on the day before expatriation. The procedural requirements therefore affect the substantive tax result.

---

6. Why can a rollover from the 401(k) to a traditional IRA materially change the result?

Answer. Because a traditional IRA is a specified tax-deferred account, not an eligible deferred-compensation item.

If Jordan is covered and holds a traditional IRA on the day before expatriation, the entire taxable interest is generally treated as distributed on that day. The deemed distribution is included in income even though Jordan receives no cash. The separate 10 percent early-distribution tax does not apply to the deemed distribution, but ordinary income tax can still be substantial.

EXHIBIT 3 Employer 401(k) Versus Traditional IRA if Jordan Is Covered

Assume Jordan rolls the full $1.3 million 401(k) into a traditional IRA and remains covered. The rollover itself may be tax free under the ordinary retirement-plan rules, but the account’s expatriation classification changes. Jordan can then face a $1.3 million deemed distribution in the expatriation year without receiving the cash needed to pay the tax.

The practical conclusion is not that a rollover is always wrong. It is that the rollover decision should follow the covered-expatriate analysis, not precede it.

---

7. Can Jordan reduce net worth below $2 million without creating a sham transaction?

Answer. Potentially. A completed transfer can reduce net worth, but the property must genuinely leave Jordan’s ownership and control.

Assume Jordan gives $350,000 of cash and marketable securities to an adult child. Jordan retains no right to reclaim the property, no right to its income, and no power to direct its use. The transfer is completed and documented before the expatriation date, and Form 709 is filed if required. Jordan’s illustrative net worth falls from $2.3 million to $1.95 million.

EXHIBIT 4 Illustrative Effect of a Completed Gift

The gift is not economically free. Jordan permanently gives up the property. The transfer may use federal gift and estate tax exclusion, may require a gift tax return, and generally carries Jordan’s income-tax basis to the recipient. Form 8854 also asks about significant changes in assets and liabilities during the five preceding years, so the transfer must be disclosed and explained consistently.

A transfer that leaves Jordan with possession, income, control, or another retained beneficial interest may not achieve the intended result. The 401(k) itself ordinarily cannot simply be assigned to a child, which means the planning usually must involve transferable nonretirement assets.

---

8. Which transactions look helpful but do not actually reduce net worth?

Answer. Transactions that merely change the form or location of value generally do not reduce the balance sheet.

Withdrawing money from the 401(k) and depositing the proceeds in a bank account substitutes cash for retirement assets. Borrowing against property generally creates both cash and an offsetting liability. Moving investments between institutions, changing title without transferring beneficial ownership, or rolling the 401(k) into an IRA changes the container, not the taxpayer’s economic ownership.

A legitimate reduction requires a real economic change: satisfying an enforceable liability, spending money for value consumed, paying tax generated by a transaction, or completing a transfer in which Jordan permanently parts with the property. The net-worth test focuses on substance, not labels.

---

9. Why is the five-year compliance test as important as the $2 million test?

Answer. Because failure to certify full federal tax compliance independently creates covered-expatriate status, regardless of net worth or tax liability.

Jordan must be able to certify compliance for the five tax years ending before the expatriation year. The review should test the filed income tax returns, required international information returns, gift tax filings when applicable, and payment records. It should also reconcile the Form 8854 balance sheet with prior disclosures so that foreign accounts, business interests, pensions, trusts, and other assets do not appear for the first time without explanation.

A late or corrected filing does not automatically prevent certification, but the underlying obligation must actually be satisfied. The review must be completed before Jordan signs Form 8854 under penalties of perjury. Reducing net worth to $1.95 million is not enough if the compliance certification remains unsupported.

---

10. What do Form I-407, Form 8854, and Form W-8CE each accomplish?

Answer. They serve different functions and should not be treated as interchangeable forms.

• Form I-407 records the abandonment of lawful permanent resident status. Under the applicable tax rules, the abandonment date generally determines the termination of long-term residency and the expatriation date.
• Form 8854 is the federal tax-reporting statement. It applies the covered-expatriate tests, certifies five-year compliance, reports the balance sheet, and discloses the applicable Section 877A regimes.
• Form W-8CE is the notice delivered to each affected payor or trustee for eligible deferred compensation, specified tax-deferred accounts, or nongrantor trusts, as applicable. For a qualifying 401(k), it is part of securing the later withholding treatment.

Form 8854 does not itself terminate the green card. Conversely, surrendering the green card does not eliminate the Form 8854 filing requirement. The immigration event, tax classification, and payor notice must be coordinated, but each has a distinct legal purpose.

---

11. What federal income tax return is filed for the expatriation year?

Answer. Jordan generally files a dual-status federal return together with an initial Form 8854.

Assuming Jordan is a nonresident on December 31, the general dual-status procedure uses Form 1040-NR as the return and Form 1040 as the statement for the resident portion of the year. The resident period generally includes worldwide income through the residency-termination date. The nonresident period follows the U.S.-source and effectively connected income rules applicable to nonresident aliens.

The initial Form 8854 is required whether Jordan is covered or noncovered. If Jordan is covered, the form also reports mark-to-market property, deferred compensation, specified tax-deferred accounts, nongrantor trusts, and any deferral election. A required Form 8854 that is late, incomplete, or incorrect can trigger a $10,000 penalty, subject to the reasonable-cause rules.

Current-year instructions should be checked for the exact attachment, duplicate-filing, address, and signature requirements applicable to the 2026 return.

---

12. How are later 401(k) distributions treated after expatriation?

Answer. The result depends on whether Jordan avoided covered status and, if covered, whether the plan qualified as eligible deferred compensation.

If Jordan is not covered, Section 877A’s special 30 percent eligible-deferred-compensation rule does not apply. Later plan payments are analyzed under the ordinary federal rules for nonresident aliens, including source rules, withholding provisions, and any treaty that remains available.

If Jordan is covered and the 401(k) is eligible deferred compensation, the payor generally withholds 30 percent from each taxable payment. Jordan’s treaty waiver prevents a treaty reduction of that withholding for the item. Jordan may also have continuing annual Form 8854 obligations while the item remains outstanding.

The eligible regime is therefore a deferral mechanism, not an exemption. It prevents a full deemed distribution at expatriation but replaces that result with future withholding and continuing reporting.

---

13. Why can covered-expatriate status affect Jordan’s U.S. children years later?

Answer. Section 2801 can impose a separate recipient-level tax on covered gifts and bequests received from a covered expatriate.

For 2026, a U.S. citizen or resident who receives aggregate covered gifts or covered bequests exceeding $19,000 generally computes the tax at 40 percent, subject to statutory exceptions and reduction for qualifying foreign gift or estate tax. The U.S. recipient, not Jordan, reports and pays the tax on Form 708. For Section 2801, individual residence is determined under federal gift and estate tax domicile principles, not the income-tax residency tests.

Assume a covered Jordan later gives $500,000 to a U.S. child in 2026. Before other adjustments, the taxable base is $481,000 after the $19,000 exclusion, producing an illustrative Section 2801 tax of $192,400. If Jordan avoids covered status, the transfer is not a covered gift merely because Jordan was once a long-term green card holder.

Transfers to a spouse or charity, property timely subjected to U.S. gift or estate tax, qualified disclaimers, and transfers through trusts have additional rules. The final Section 2801 regulations and Form 708 now provide the reporting framework for covered gifts and bequests received on or after January 1, 2025.

---

Putting the Case Together

The analysis produces two materially different outcomes. Neither outcome should be selected by looking only at the immediate mark-to-market tax. The decision also affects the 401(k), continuing reporting, and future transfers to U.S. family members.

EXHIBIT 5 Jordan Avoids Covered Status or Jordan Remains Covered

---

Conclusion

A large 401(k) makes green-card expatriation difficult because the account performs two different functions in the analysis. It can cause the taxpayer to cross the $2 million covered-expatriate threshold, yet it may avoid immediate inclusion if it remains a qualifying employer-plan interest and the notice and treaty-waiver requirements are satisfied. A rollover to a traditional IRA can reverse that advantage by placing the entire account into the deemed-distribution regime.

The analysis begins by determining whether the taxpayer is a long-term resident, then applies the three covered-expatriate tests, classifies each asset under Section 877A, evaluates genuine planning alternatives, and completes the reporting and payor-notice requirements. That structure reveals the actual decision: whether to part permanently with enough property to avoid covered status, or retain the property and manage the continuing federal consequences of remaining covered.

---

IRS-Grounded Source Notes

These notes identify the principal federal authorities supporting the article. Current-year forms, filing addresses, thresholds, and procedures should be checked again for the actual expatriation year.

1. Long-term resident and expatriation date. IRC §§ 877A(g)(2)-(3) and 7701(b)(6); 2025 Instructions for Form 8854, “Long-term resident (LTR) defined” and “Date of termination of long-term residency.” IRS Instructions for Form 8854

2. Covered-expatriate tests and 2026 thresholds. IRC § 877A(g)(1); IRC § 877(a)(2); Rev. Proc. 2025-32, §§ 4.37-.38, providing the 2026 $211,000 average-tax threshold and $910,000 mark-to-market exclusion. IRS Internal Revenue Bulletin 2025-45

3. Net worth and significant pre-expatriation changes. 2025 Instructions for Form 8854, Part II, Section A, lines 2-3 and the gift example; Part II, Section B balance sheet. IRS Instructions for Form 8854

4. Mark-to-market tax and long-term-resident basis rule. IRC § 877A(a)-(c), (h); Notice 2009-85, §§ 3-4; 2025 Instructions for Form 8854, Part II, Sections C-D. Notice 2009-85

5. Employer 401(k), eligible deferred compensation, and Form W-8CE. IRC § 877A(d); Notice 2009-85, § 5; 2025 Instructions for Form 8854; Form W-8CE (Rev. Oct. 2025). IRS Form W-8CE

6. Traditional IRAs and specified tax-deferred accounts. IRC § 877A(e); Notice 2009-85, § 6; 2025 Instructions for Form 8854, Part II, Section C, line 1c. IRS Instructions for Form 8854

7. Five-year compliance certification, initial filing, annual filing, and penalties. IRC § 6039G; IRC § 877A(g)(1)(A); 2025 Instructions for Form 8854, “Who Must File,” “When To File,” “Where To File,” Part II, Section A, line 7, and Part III. IRS Instructions for Form 8854

8. Dual-status return. IRS Publication 519 (2025), chapters 4 and 6; 2025 Instructions for Form 1040-NR, including the rules for former U.S. long-term residents. IRS Publication 519

9. Covered gifts and bequests. IRC § 2801; T.D. 10027 and 26 C.F.R. Part 28; December 2025 Instructions for Form 708. For 2025 and 2026, the Section 2801(c) amount is $19,000, and the tax computation uses 40 percent. IRS Instructions for Form 708

---

Professional-Use Disclaimer

This article is for general educational purposes only and does not constitute legal, tax, accounting, investment, or immigration advice. Expatriation outcomes depend on each taxpayer’s specific facts, current law, and filing requirements. For individualized advice, schedule a consultation

Book a Consultation