A new US tax regulation, seventeen years in the making, has recently come into effect which may create a tax liability on the gifts made by former US citizens, even after renouncing US citizenship.

Whilst Section 2801 of the tax code came into being back in 2008, it has only this year become a final regulation, and is imposed on gifts made by “covered expatriates”.

Whilst many have come across this term before, lesser known are the tax implications associated with being a covered expatriate.

In our article today, we’ll discuss who is a covered expatriate, and the long term issues associated with this as a result of new legislation.

Who is a Covered Expatriate

When a US citizen renounces US citizenship, individuals are classed into two categories for tax purposes, a covered expatriate and a non-covered expatriate.

A covered expatriate is an individual who meets any of the below conditions, as of the date that their renunciation appointment at a US consulate takes place:

-          Had a net worth on the date of expatriation of $2 million or greater

-          Had had an average annual net income tax for the prior five years of greater than $206,000 (2025 figure, this is updated each year)

-          Did not certify on IRS Form 8854 that they complied with all U.S. federal tax obligations for the five years preceding expatriation.

Essentially, a covered expatriate is deemed to have renounced for the purpose of avoiding US tax, and as a result, special tax rules apply.

A covered expatriate is generally exposed to an “exit tax” upon renouncing US citizenship.

A non-covered expatriate is an individual who doesn’t meet the conditions above, and generally won’t be subject to any exit tax.

What are the US Tax Implications of being a Covered Expatriate

As mentioned above, a covered expatriate can be subject to an exit tax upon renouncing US citizenship. This type of tax is essentially a capital gains tax, and is captured using section 877A of the US Tax Code:

§ 877A (a)(1) - All property of a covered expatriate shall be treated as sold on the day before the expatriation date for its fair market value.

This code section above is part of the laws which form the exit tax, and requires a covered expatriate to treat their worldly possessions as sold on the day of their renunciation. Any unrealised gains calculated, can then be subject to tax as an exit from the US tax system. In essence, the US did not want people leaving the US tax system with a large amount of unrealised gains, that had never been taxed in the US.

Fortunately, large exclusions are available to prevent an actual tax liability occurring as part of the exit tax.

Do Covered Expatriates need to continue filing US tax returns?

Yes, generally speaking a requirement to file each year, Form 8854 – Annual and Initial Expatriation Statement exists.

What is new US tax code section 2801? How does it affect former US citizens?

Code section 2801 imposes tax on US citizen recipients of gifts, made by covered expatriates.

US Code § 2801 (a)

If, during any calendar year, any United States citizen or resident receives any covered gift or bequest, there is hereby imposed a tax equal to the product of—

(1)the highest rate of tax specified in the table contained in section 2001(c) as in effect on the date of such receipt, and

(2)the value of such covered gift or bequest.

(b)Tax to be paid by recipient - The tax imposed by subsection (a) on any covered gift or bequest shall be paid by the person receiving such gift or bequest.

As mentioned earlier in the article, this code section was first conceived in 2008, and it has taken the IRS some 17 years to finalise the regulation.

The impact of this regulation, is that if a US citizen receives a gift from an individual who has renounced citizenship, then this gift can be subject to tax (payable by the recipient).

The tax will generally be equal to 40% of the value of the gift (the top US estate tax rate), on any gift over the annual exclusion amount, which is $19,000 USD for 2025.

This regulation applies to any gifts received after 1st January 2025, and only to gifts received from former US citizens who renounced after 17th June 2008 (when code section 877a came into being).

In the case that a gift is made to a New Zealand trust, the tax applies when the trust distributes out to a US citizen.

How do I report a 2801 gift?

Section 2801 gifts will be reported on Form 708. However, at the time of writing this article, the form has not yet been publicly released, so we can’t be certain of the complexity involved in preparing it.

How does Section 2801 affect renunciation of US citizenship?

Keeping and maintaining US citizenship offers excellent benefits, and there’s no doubting that the US is one of the most desirable countries for migration to.

However, for those considering renouncing, consideration will need to be made as to whether immediate family or relatives will indeed be retaining US citizenship, as this will complicate future gifting and estates.

Given this most recent legislation, it may well be worth re-considering renunciation, for those in the covered expatriate category.

Summary

Whilst it was known previously that renouncing US citizenship didn’t necessarily end all US tax obligations, the introduction of code section 2801 has made the possibility of gifting or inheritance quite a complex and costly affair, post renunciation.

At The US Tax Team New Zealand, we offer US tax advice to discuss these areas with a US tax professional. Reach out to us today – info@usatax.nz