The sins of the donor: the hidden costs of US expatriation

Boris Johnson. Tina Turner. What do a former British Prime Minister and the Queen of Rock 'n' Roll have in common?

Aside from a penchant for sporting outlandish hairstyles, both Johnson and Turner were natural-born US citizens that later elected to formally renounce their citizenship. In the face of increasingly onerous tax compliance and growing geopolitical uncertainty, more than 21,000 US persons have made the same election since 2020; some 4,820 US passports and green cards were surrendered in 2024 alone. Unfortunately, the IRS ensures that expatriation is seldom straightforward, or cheap.

Exit, pursued by a tax

In an effort to minimise the loss of a lifetime of tax revenue, Internal Revenue Code (‘IRC’) Section 877A designates any US citizen who relinquishes citizenship, or green card holder who ceases to be a US lawful permanent resident, a ‘covered expatriate’ if they satisfy any of the following criteria:

• An average annual net income tax for the five years ending before the date of expatriation or termination of residency that exceeds $211,000 (as of 2026).
• A net worth equivalent to $2 million or more on the date of their expatriation or termination of residency.
• Failure to certify on Form 8854 that they have complied with all US federal tax obligations for the five years preceding the date of their expatriation or termination of residency.

The most immediate consequence of covered expatriate status is the notorious US exit tax. The exit tax treats the point of renunciation as a ‘deemed sale’ event, taxing any unrealised gains on a covered expatriate’s worldwide assets as if they were sold at fair market value the day before departure. Certain assets are excluded from this deemed-sale treatment and instead taxed as if they were fully distributed at expatriation, even though no payment is received. This includes specified tax-deferred accounts as well as some pension and deferred compensation arrangements, resulting in the accelerated taxation of retirement and deferred income assets that would have otherwise been taxed gradually over time.

While certain allowances and deductions are made available, the resultant tax liability for wealthier individuals is often significant. However, as of 2025, there may be a further sting in the tail for covered expatriates and their beneficiaries.

Gifts wrapped in red tape

Historically, the IRS has not taxed US taxpayers on the receipt of gifts or bequests, from US persons and non-US persons alike. Instead, these taxes are typically assessed on the individual making the gift or the estate making a distribution. As of January 2025, IRC Section 2801 has changed that.

Originally introduced as part of the Heroes Earnings Assistance and Relief Tax (‘HEART’) Act of 2008, the implementation of IRC Section 2801 stalled for 17 years due to the absence of finalised regulations and a prescribed reporting mechanism. However, following the release of Form 708, United States Return of Tax for Gifts and Bequests Received from Covered Expatriates (available here), IRC Section 2801 was brought into effect on 14 January 2025, and applies to any gift or bequest received from a covered expatriate on or after 1 January 2025.

Under IRC Section 2801, any gift or bequest received by a US citizen or resident under virtue of the Estate and Gift tax regimes from a covered expatriate are subject to a discrete tax at a flat rate of 40%. The tax applies regardless of where the assets are located or where the gift is received and includes assets that were acquired by the covered expatriate after expatriation. Even distributions from non-US trusts funded by covered expatriates are within scope.

Unlike the standard US gift and estate tax regime, the recipient bears the responsibility of determining whether the transfer was received from a covered expatriate, filing the return accordingly, and, critically, paying any tax owed. While the standard annual gift tax exclusion ($19,000 as of 2026) may be used, the standard lifetime gift and estate tax exemption ($15 million as of 2026) is not available with respect to transfers from covered expatriates.

It is extremely important to note that even individuals who do not exceed the wealth or income thresholds may still be classified as covered expatriates due to technical noncompliance. This means that individuals with minimal wealth or tax liabilities at the point of expatriation could nevertheless unwittingly trigger substantial tax obligations for a recipient years down the line.

Take, for example, Sarah, a US citizen who became a UK citizen through marriage. After much deliberation, Sarah decided to surrender her US citizenship in 2012. While Sarah did not meet the income or net worth thresholds at the time of her departure, her failure to submit FBARs detailing her UK bank accounts resulted in her designation as a covered expatriate. By 2025, Sarah had built a successful company in Spain and become a multimillionaire. In 2026, she chooses to make a lifetime gift of $3 million of cash to her son, who remains a US citizen. While Sarah’s wealth was wholly accumulated post-expatriation, the entire $3 million constitutes a covered gift and her son now owes the IRS a tax bill of approximately $1.192m (40% of the excess above the $19,000 annual exclusion).

Exclusions may apply

Several important exclusions are available under Section 2801, provided that recipients are aware of their reporting obligations and remain compliant. These include:

• Transfers reported on a timely filed US gift or estate tax return.
• Transfers made to a US citizen spouse that qualify for the marital deduction.
• Qualified charitable donations that are eligible for the estate or gift tax charitable deduction.
• Direct payments under Section 2503(e) for tuition or medical care.
• Qualified disclaimers, whereby the recipient refuses the gift.
• Transfers not received by a US citizen or resident.
• Transfers that do not exceed the annual exclusion amount ($19,000 as of 2026).

File accordingly

Form 708 must be filed on or before the 15th day of the 18th calendar month following the end of the year in which the covered gift or bequest was received, with the first filings due on 15 July 2027, for gifts or bequests received during the 2025 calendar year.

US recipients who have reasonably concluded that the transferor is not a covered expatriate may elect to file a ‘protective’ Form 708 that starts the clock on the statute of limitations for assessment by the IRS. To do so, the recipient must submit an affidavit, signed under penalties of perjury, that evidences the information and methodology used to determine that the gift or bequest was not covered.

Form 3520 may also be required when reporting gifts or bequests exceeding $100,000 from foreign persons or estates, or for distributions from a foreign trust, regardless of their value.

Conclusion

Given the growing number of expatriations and the relative ease with which covered expatriate status can arise, the enforcement of IRC Section 2801 has the potential to lead to unexpected and potentially severe tax consequences for covered expatriates and their beneficiaries. If you are a US person that is planning to expatriate, has already expatriated, or will receive monies from an individual that has expatriated, advance planning is more critical than ever.