Can I Defer Payment of the U.S. Exit Tax After Renouncing Citizenship?

Covered expatriates can elect to defer payment of the exit tax on eligible assets by making an irrevocable election on Form 8854 and posting adequate security (such as a bond or letter of credit) with the IRS. Interest accrues on the deferred tax from the expatriation date until payment (IRS: Section 877A – Tax Responsibilities of Expatriation).

How the deferral works:

Which assets qualify for deferral:

• Stocks, bonds, and securities with unrealized gain
• Real estate (both U.S. and foreign)
• Business interests and partnership stakes
• Most capital assets subject to the mark-to-market deemed sale

What cannot be deferred:

• Specified tax-deferred accounts (IRAs, 401(k)s) are treated as immediate lump-sum distributions with tax due in the expatriation year
• Nongrantor trust interests follow separate rules under Section 877A(f)
• Deferred compensation from U.S. sources triggers 30% withholding, not deferral

Practical considerations:

• The bond requirement is the biggest barrier: posting a surety bond or irrevocable letter of credit large enough to cover the deferred tax is expensive and logistically difficult from abroad
• Interest compounds: at the federal underpayment rate, multi-year deferrals can substantially increase the total cost
• Annual Form 8854 filing continues until all deferred tax is paid, creating ongoing compliance obligations
• Selling a deferred asset triggers the tax on that asset’s allocated gain, plus accumulated interest

Most covered expatriates pay the exit tax in the expatriation year rather than electing deferral, because the security and interest costs often exceed the cash-flow benefit. Deferral is most useful for illiquid assets, such as real estate or closely held business interests, that cannot be easily sold to fund the tax.

For more, see our Exit Taxes guide.