Renouncing American citizenship, or surrendering a long-held green card, does not end the relationship with the IRS: it closes it, on the IRS's terms. For Americans in France, the cost of leaving is decided by five years of filings, not by the size of the fortune.
An accidental American living in Lyon decides to renounce. The consular appointment is booked, the fee is paid, the oath is taken. Two years later, her adviser discovers that she never filed the certification of her last five years of compliance. For the IRS, she is therefore a covered expatriate: she is deemed to have sold everything she owned the day before her renunciation, and her American children will pay 40% on everything she gives or leaves them.
In our article on accidental Americans, we set out the choice between complying, renouncing and waiting. This article deals with what happens when one leaves: who becomes a covered expatriate, what the exit actually costs, what survives the exit, and how France treats an American tax it does not recognize.
Part I identifies who is concerned. Part II measures the cost of the exit. Part III examines the French view. Part IV gives the method.
I. Who is concerned
A. Citizens and long-term residents
The American expatriation regime applies to two categories. Citizens who relinquish their nationality, generally by renouncing before an American consular officer. And long-term residents who end their status: holders of a green card for at least eight of the last fifteen tax years. This second category is the one people forget. A French family that lived in the United States for a decade with green cards, then came back to France, falls within the regime when it formally surrenders its cards, and the expatriation date is that formal surrender, not the date of the return to France.
B. The three tests of the covered expatriate
Leaving is not taxed in itself. Only the covered expatriate is taxed, defined by three alternative tests. The tax liability test: an average annual net income tax liability, over the five years before expatriation, above 211,000 dollars for a 2026 expatriation. The net worth test: a worldwide net worth of at least 2 million dollars on the expatriation date, an amount that is not indexed. And the certification test: failing to certify, on Form 8854 and under penalties of perjury, compliance with all federal tax obligations for the five preceding years. One test is enough.
The third test is the one that catches Americans in France. Most of them pay little or no American tax thanks to foreign tax credits and have modest net worth, but many have never filed. The Tax Court's leading case is unambiguous: a German citizen who had held a green card since 1977 and surrendered it in 2010 was held to be a covered expatriate because he had not filed Form 8854 and could not, in any event, have certified five years of compliance (Topsnik v. Commissioner, 146 T.C. 1 (2016), affirmed by the D.C. Circuit). The installment note he held was deemed sold, and the whole gain taxed.
C. The exceptions
Two categories escape the tax liability and net worth tests: individuals who were dual nationals from birth, who remain nationals and tax residents of the other country, and who have not been American residents for more than ten of the last fifteen years; and minors who renounce before eighteen and a half, under a similar residence condition. Many accidental Americans born in the United States to French parents fall within the first exception. But the exception does not dispense with the third test: the IRS instructions specify that these individuals remain covered expatriates unless they file Form 8854 and certify their five years of compliance.
II. What the exit costs
A. The deemed sale of everything, and the exclusion
The covered expatriate is treated as having sold all of his worldwide property at fair market value the day before expatriation. The resulting net gain is reduced by an indexed exclusion of 910,000 dollars for 2026, and the balance is taxed at the ordinary rates applicable to the type of gain. The exclusion does not change the character of the gain, and the deemed sale applies whatever the date or place of acquisition of the property: a Paris apartment bought twenty years ago, French shares, a portfolio. The basis of each asset is computed in dollars, so a rise of the euro against the dollar can create an American gain even when the euro value has not moved. The tax may be deferred until the actual sale on election, but only against adequate security and with interest.
B. The special regimes: deferred compensation, retirement accounts, trusts
Some assets escape the deemed sale and follow their own rules. Specified tax-deferred accounts, such as American retirement accounts, are treated as fully distributed the day before expatriation, without the exclusion. Some deferred compensation is subject to a 30% withholding on future payments. And distributions from non-grantor trusts to a covered expatriate also bear a 30% withholding. The covered expatriate who holds such assets loses the benefit of the treaty on the corresponding withholdings.
C. The tax that survives: gifts and bequests to Americans
The regime does not stop at the exit. Any gift or bequest from a covered expatriate to an American citizen or resident is taxed in the hands of the recipient at the highest gift and estate tax rate, currently 40%, above the annual exclusion (IRC, section 2801). The provision dates from 2008 but remained dormant until the final regulations of 14 January 2025, which apply it to transfers received from 1 January 2025 and create a dedicated return, Form 708, due by the fifteenth day of the eighteenth month following the year of receipt. The burden of determining whether the donor is a covered expatriate falls on the American recipient. A credit is allowed for foreign gift or estate tax paid on the same transfer, which, for a French family, means that French duties reduce the American tax without eliminating it when the French rate is lower. For a parent whose children live in the United States, this tax is often the decisive argument for staying below the thresholds.
III. The French view
A. A gain France does not see
France does not tax latent gains of its residents, and the American deemed sale does not change the French basis of the assets. When the former American later sells, France taxes the entire gain since the original acquisition, according to its own rules, and no mechanism allows the American exit tax, paid years earlier on a deemed event, to be credited against the French tax due on the actual sale. We have found no French decision addressing this mismatch. The result is a double taxation of the same gain, separated in time: the American tax on departure, the French tax on the sale. For a resident of France, the real cost of being a covered expatriate is therefore not the American rate alone, but the sum of the two.
B. The treaty: ten more years of American taxation
The France-US treaty adds a final layer. Notwithstanding its other provisions, a former citizen or former long-term resident may, for ten years following the loss of that status, be taxed in accordance with American law on income having its source in the United States, or deemed to have it (convention of 31 August 1994, art. 29, para. 2, as amended in 2009). Renunciation therefore does not immediately sever the American taxation of American-source income, such as dividends from US companies or income from American real property.
IV. The method
A. Pass the tests before renouncing
The order is fixed. First, compliance: the five years preceding expatriation must be complete and correct before Form 8854 is signed, which in practice means a regularization, usually through the streamlined procedure, with the accounts and forms we listed in our FBAR inventory and the French funds treated as PFICs, as explained in our analysis of assurance-vie. Then the net worth: measured in dollars on the expatriation date, it can sometimes be brought below 2 million dollars by gifts made before expatriation, in particular to a non-American spouse within the annual exclusion specific to such gifts, provided these gifts are genuine and documented. Finally the calendar: the expatriation date, which is the date of renunciation before the consular officer confirmed by the certificate of loss of nationality, sets the measurement of every test.
B. The simplified route of the Relief Procedures
For accidental Americans who never filed, the IRS offers a simplified route, the Relief Procedures for Certain Former Citizens: under conditions of good faith, absence of filing history, net worth below 2 million dollars and limited aggregate tax, the former citizen files the last returns and certifies compliance without tax or penalty, and escapes covered expatriate status. We detailed its conditions in our article on accidental Americans. It is the cleanest exit when the conditions are met; it is closed to anyone who exceeds them.
C. Form 8854 and the expatriation date
Form 8854 is filed with the return for the year of expatriation, by its due date. It is both the certification that avoids covered status and the computation of the exit tax when the status applies. It must not be confused with the consular formalities: the certificate of loss of nationality settles nationality, Form 8854 settles taxation. Many former Americans hold the first without ever having filed the second, and are therefore covered expatriates without knowing it.
D. Our position
For most Americans in France, renunciation can be free of American tax, provided it is preceded by a complete regularization and followed by a correctly filed Form 8854. The cost of leaving is decided by the file, not by the fortune. For larger estates, the exit is prepared two or three years in advance, because the real cost combines the American tax on departure, the French tax on the later sale of the same assets, and the 40% tax on the American heirs. And for French families who held green cards in the United States, the date to watch is the eighth year: surrendering the card before becoming a long-term resident avoids the regime entirely.
Conclusion
The American expatriation regime taxes only covered expatriates, and for most Americans in France, the test that makes them covered is not wealth but the absence of certified compliance. The consequences are heavy: a deemed sale of all assets above a 910,000 dollar exclusion, special regimes for retirement accounts and trusts, a 40% tax on American heirs now fully operational since 2025, and ten years of continued American taxation of American-source income under the treaty. France, for its part, ignores the exit tax and will tax the same gain again on the actual sale.
The practical rule fits in one sentence: never renounce before being compliant, and never consider the matter closed before Form 8854 is filed. Between the two, the decision whether to stay below the thresholds is made with the heirs in mind.
Frequently asked questions
I am an accidental American with modest assets. Will I pay an exit tax if I renounce?
Not necessarily, but only if you can certify your compliance. With a net worth below 2 million dollars and an average American tax liability below 211,000 dollars, you escape the first two tests. The third test remains: you must certify on Form 8854 that you complied with all your federal obligations for the five years before renunciation. Without that certification, you are a covered expatriate regardless of your wealth. The Relief Procedures for Certain Former Citizens can allow you to regularize and certify without tax or penalty if you meet their conditions.
I was born in the United States to French parents and have always lived in France. Am I exempt?
Partly. Individuals who were dual nationals from birth, who remain tax residents of their other country and have not been American residents for more than ten of the last fifteen years escape the net worth and tax liability tests. But they must still file Form 8854 and certify five years of compliance; otherwise, the IRS instructions treat them as covered expatriates.
Does France take the American exit tax into account when I later sell my assets?
In principle no. France does not tax latent gains, does not recognize the American deemed sale, and taxes the entire gain since acquisition when you actually sell. No mechanism allows the American tax paid on departure to be credited against that French tax. For a covered expatriate resident in France, the same gain can therefore be taxed twice, at two different dates.
My children live in the United States. What happens if I renounce as a covered expatriate?
Every gift or bequest you make to them will be taxed in their hands at 40% above the annual exclusion, under section 2801 of the Code, applicable since 1 January 2025. They must file Form 708 and determine themselves whether you are a covered expatriate. French gift or succession duties paid on the same transfer reduce the American tax through a credit, without eliminating it. This tax is often the decisive reason to prepare the exit so as to remain below the thresholds.