For most Americans who give up their passport in Italy, the US exit tax is zero. For a minority it is a six-figure bill on gains they never cashed, and Italy adds two complications of its own: the occupational pension funds many long-term residents hold, and an Italian tax system that will look at the same assets again later. This article runs one fictional renunciation in Milan in December 2026 from the covered-expatriate tests to the final number, using the 2026 figures in IRS Revenue Procedure 2025-32. The persona and his figures are illustrative, not a real case — for the rules themselves, see our guide to the US exit tax.
Meet Daniel: the facts of the example
Daniel is 58. He was born in Boston with US citizenship only, moved to Milan in 2005 and later naturalized as an Italian citizen. He has filed every US return and FBAR since leaving. He takes the renunciation oath before a US consular officer in Milan on December 1, 2026, and the State Department later issues his Certificate of Loss of Nationality.
The date matters because a citizen relinquishes citizenship on the earliest of four statutory dates, and an oath before a consular officer counts only once the certificate is issued. Daniel's expatriation date is December 1, 2026; every value below is measured on the day before, November 30, 2026.
His balance sheet that day, in dollars:
| Asset or liability | Fair market value | Cost basis | Built-in gain (loss) |
|---|---|---|---|
| US brokerage account (ETFs, held for years) | $1,200,000 | $500,000 | $700,000 |
| Quotas in an Italian S.r.l. he co-founded | $900,000 | $30,000 | $870,000 |
| Milan apartment (principal residence) | $850,000 | $600,000 | $250,000 |
| Italian government bonds (BTP) | $95,000 | $120,000 | ($25,000) |
| Italian occupational pension fund (fondo pensione) | $180,000 | — | taxed separately (Step 4) |
| Traditional IRA | $250,000 | — | taxed separately (Step 4) |
| Cash | $100,000 | $100,000 | $0 |
| Mortgage on the apartment | ($150,000) | — | — |
| Net worth | $3,425,000 |
His other 2026 income is a $140,000 salary from his Milan employer for the part of the year he was still a citizen. Italy's personal income tax (IRPEF) applies 23% up to €28,000, 33% up to €50,000 and 43% above that in 2026 — the second-bracket rate the 2026 Italian budget law cut from 35% — so his Italian tax on that salary exceeds the US tax on it and the foreign tax credit has kept his US bill near zero for years.
The simplifications are deliberate: no US employer plan, no trust interests, no fund holdings that would count as a passive foreign investment company, and the S.r.l. is treated as an ordinary operating company. For the Italian side of Daniel's life more broadly, see our Italy country guide.
Step 1: Is Daniel a covered expatriate?
The exit tax reaches only a covered expatriate. For anyone expatriating after June 16, 2008, that means meeting any one of three tests:
- Net worth test: $2 million or more on the expatriation date, a figure fixed in the statute and not indexed.
- Tax liability test: average annual net income tax for the prior five years above $211,000 for 2026, up from $206,000 for 2025. The figure is US tax after the foreign tax credit, which is how Form 8854 asks you to compute it.
- Certification test: failing to certify on Form 8854 five years of full federal tax compliance.
Daniel passes the liability test easily: Italian taxes credited against his US liability leave a five-year average of a few thousand dollars. He passes the certification test because his filings are complete. But his $3,425,000 net worth is far above $2 million, so he is covered.
The two exceptions do not help him. They are reserved for people who were dual citizens at birth, still hold and are taxed as residents of the other country, and spent no more than 10 of the last 15 years as US residents, and for people who relinquish before age 18½ after no more than 10 years of US residence. Daniel acquired Italian citizenship as an adult.
Step 2: The deemed sale
A covered expatriate is treated as selling all of his property at fair market value on the day before expatriation. Gains are taxed in that year; losses count where the Code otherwise allows them, and the wash-sale rule does not apply.
| Asset | Deemed gain (loss) |
|---|---|
| US brokerage account | $700,000 |
| Italian S.r.l. quotas | $870,000 |
| Milan apartment | $250,000, assumed fully sheltered by the principal-residence exclusion under §121, leaving $0. Whether that exclusion applies to a deemed sale under §877A is itself genuinely unsettled — the statute's own "notwithstanding any other provision" language can be read either way, and specialist commentary is divided. If it did not apply here, Daniel's tax would rise by about $59,500. |
| Italian government bonds | ($25,000) |
| Net deemed gain | $1,545,000 |
The S.r.l. quotas are swept in even though they are shares of an Italian company held by an Italian resident: the deemed sale reaches worldwide property. The bond loss is usable against the gains, so it pays to value the losers as carefully as the winners. One practical trap: assets bought in euros need a dollar basis translated at the exchange rate of the purchase date, so euro–dollar moves since 2005 change the gain.
Step 3: Apply the $910,000 exclusion
The statute reduces the deemed-sale gain by an amount set at $600,000 in 2008 and indexed each year, never below zero. For 2026 it is $910,000.
Under IRS guidance the exclusion is spread over the gain assets in proportion to their built-in gain, and losses are netted afterwards:
| Gain asset | Built-in gain | Share of exclusion | Taxable gain |
|---|---|---|---|
| US brokerage account | $700,000 | $405,732 | $294,268 |
| Italian S.r.l. quotas | $870,000 | $504,268 | $365,732 |
| Total | $1,570,000 | $910,000 | $660,000 |
Subtracting the $25,000 bond loss leaves $635,000 of long-term capital gain. (This treats the apartment as fully sheltered and outside the allocation, tied to the §121 point above.)
Step 4: The IRA and the Italian pension fund
Retirement savings follow separate rules, and this is where the Italian case diverges most from a simple portfolio.
The IRA. A "specified tax deferred account", which covers individual retirement plans other than SEP and SIMPLE arrangements, along with 529, Coverdell, ABLE, health savings and Archer MSA accounts, is treated as fully distributed on the day before expatriation, with no early-distribution penalty. The $910,000 exclusion applies only to deemed-sale gain, so it does not reduce this inclusion. Daniel adds $250,000 of ordinary income.
The Italian pension fund. An interest in a foreign pension plan is a "deferred compensation item". Only an item paid by a US person, or by a foreign payor that elects US treatment, can be "eligible" for the alternative of 30% withholding on later payments; everything else is "ineligible", and the present value of the accrued benefit is treated as received the day before expatriation. The IRS's own guidance applies this to a foreign pension trust whose trustee has not elected US treatment, and it excludes the taxpayer's investment in the contract from the amount reported. The carve-out for services performed abroad while not a US citizen or resident does not help a lifelong citizen like Daniel.
We assume his fondo pensione balance of $180,000 includes $100,000 of contributions that were already taxed in the US, which count as investment in the contract — in practice, employer and employee contributions to an Italian scheme are often treated differently, so this is a simplifying assumption rather than a general rule. He therefore reports $80,000 of ordinary income from the fund. For many Americans with decades in an Italian scheme, this line — together with any severance accrual (TFR) left with the employer, whose treatment under §877A this article did not research — is the hardest number in the calculation. See our guide to US retirement accounts abroad for how foreign pensions interact with US tax more generally.
Step 5: Run the 2026 rates
Daniel's final return is a dual-status return: a Form 1040-NR for 2026 with a Form 1040 attached as a schedule for the part of 2026 before his expatriation date. Dual-status filers cannot take the standard deduction.
| Component | Amount | Character |
|---|---|---|
| Italian salary (citizen period) | $140,000 | Ordinary |
| IRA deemed distribution | $250,000 | Ordinary |
| Pension fund inclusion | $80,000 | Ordinary |
| Deemed gain after exclusion and loss | $635,000 | Long-term capital gain |
| Total taxable income | $1,105,000 |
Ordinary income tax. On the 2026 single schedule, income over $256,225 and up to $640,600 is taxed at $58,448 plus 35% of the excess over $256,225. Daniel's ordinary income is $470,000:
$58,448 + 35% × ($470,000 − $256,225) = $58,448 + $74,821.25 = $133,269.25
Capital gains tax. For 2026 the 15% rate runs to $545,500 of total taxable income for a single filer, with 20% above. The gain occupies the band from $470,000 to $1,105,000:
15% × ($545,500 − $470,000) = 15% × $75,500 = $11,325
20% × ($1,105,000 − $545,500) = 20% × $559,500 = $111,900
Capital gains tax = $123,225
Net investment income tax. The 3.8% surtax applies to the lesser of net investment income or modified adjusted gross income above $200,000 for a single filer. The deemed gain is net investment income; the IRA and pension inclusions are ordinary, deferred-compensation-type income and fall outside it, the same way other nonqualified deferred compensation distributions do. The $635,000 of gain is the smaller figure:
3.8% × $635,000 = $24,130
Total federal tax for the year: $133,269.25 + $123,225 + $24,130 = $280,624.25.
Step 6: What the exit itself cost
Without renouncing, Daniel's 2026 US tax on his salary alone would have been $17,966 plus 24% of the excess over $105,700, or $26,198, which his Italian tax offsets through the foreign tax credit.
The exit items get no such offset. Italy does not tax a US deemed sale, so there is no foreign tax on the gain, the IRA or the pension inclusion to credit, and the foreign tax credit cannot reduce the 3.8% surtax in any case.
$280,624.25 − $26,198 = $254,426.25
| Source of the exit tax | Amount |
|---|---|
| IRA and pension fund inclusions (extra ordinary tax: $133,269.25 − $26,198) | $107,071.25 |
| Deemed gains (capital gains tax + NIIT) | $147,355.00 |
| Total exit tax | $254,426.25 |
That is 7.4% of Daniel's net worth, or 13.6% of the $1,875,000 base it was computed on ($1,545,000 net gain, $250,000 IRA, $80,000 pension). Without the $910,000 exclusion, all of the extra gain would have fallen in the 20% band with the surtax on top, adding $216,580.
Italy may come back to the same assets. When Daniel later sells his S.r.l. quotas, Italy taxes individuals' gains on shareholdings with a 26% substitute tax on the gain from the Italian cost basis, and this article found no mechanism — in Italian domestic law or the US–Italy treaty — for crediting the US exit tax already paid against that later Italian tax. Italy's optional revaluation of unlisted holdings, reported at 21% of the revalued amount in 2026, is worth pricing before that sale.
What would change the number
| If instead… | Effect on the exit tax |
|---|---|
| His net worth were $1.9 million, filings clean, US tax low | Not covered: $0; he still files Form 8854 |
| Same $1.9 million, but five years of compliance could not be certified | Covered under the certification test |
| He were a dual citizen at birth, taxed as an Italian resident, ≤10 years of US residence | Exempt from the net worth and liability tests: $0 |
| The §121 exclusion were found not to apply to the deemed sale | About $59,500 more |
| He were a long-term green card holder who arrived owning the S.r.l. quotas | Basis stepped up to their value on the day he became a US resident, for exit-tax purposes |
| He elected to defer payment on the S.r.l. quotas | Tax on those quotas postponed until sale or death, with security and interest |
A long-term resident is someone who held a green card in at least 8 of the last 15 tax years; property owned when they first became a US resident gets a basis of at least its value on that day unless they irrevocably elect out.
Deferral: useful for illiquid Italian quotas
A covered expatriate can elect, asset by asset, to defer the tax on property treated as sold until the return due date for the year it is actually disposed of. The price is adequate security such as a bond or letter of credit, an irrevocable waiver of treaty rights that would block collection, and interest from the original due date; the deferral ends no later than the return for the year of death.
For Daniel the obvious candidate is the S.r.l.: shares in a private Italian company cannot be sold overnight to fund a US tax bill. Using the allocation in Step 3, the quotas carry 55% of the taxable gain ($365,732 of $660,000), so roughly that share of the gain-related tax could be deferred. The IRA and pension inclusions cannot be, because they are not property treated as sold.
The tax that follows the heirs
Under section 2801, a US citizen or resident who receives a gift or inheritance from a covered expatriate pays tax on it at the highest estate tax rate in section 2001(c), currently 40%, to the extent covered transfers received in a year exceed $19,000 for 2026. The tax is reduced by any foreign gift or estate tax paid on the same transfer.
Italy's credit is thin. Italian inheritance tax for spouses and children is 4% on the amount above €1,000,000 per beneficiary. If Daniel's daughter is a US citizen in New York, Italian tax at 4% on the excess offsets only a sliver of a 40% US tax, so much of what she inherits above the threshold could cost her close to 40 cents on the dollar. One exception narrows the base: property included in a covered expatriate's US gross estate and shown on a timely US estate tax return is not a covered bequest, which can matter for US-situs assets such as US-listed shares. For families with American children, this can outweigh the exit tax itself.
Common mistakes in an Italian exit-tax calculation
- Forgetting the pension fund. A fondo pensione is not an IRA; as an ineligible deferred compensation item its present value is taxed up front.
- Measuring income instead of tax. The $211,000 test looks at US tax after credits; an executive earning €300,000 who credits Italian tax may be far below it.
- Leaving out Italian assets. The deemed sale covers S.r.l. quotas, Italian property and Italian accounts, not just US holdings.
- Applying the exclusion to retirement accounts. The $910,000 reduces deemed-sale gain only.
- Skipping the losses. Losses on BTPs or other positions offset deemed gains, with no wash-sale rule.
- Treating compliance as a formality. Uncertified compliance makes you covered regardless of wealth, and missing Form 8854 can cost $10,000.
What it means for your final US return
Renouncing in Italy ends US citizenship, not US filing. For a 2026 expatriation:
- Pay the consular fee. For appointments on or after April 13, 2026, the State Department charges $450, down from $2,350, under a final rule published March 13, 2026.
- File the 2026 dual-status return, Form 1040-NR with a Form 1040 schedule for the citizen period, including the deemed-sale gain, the IRA distribution and the pension fund inclusion. If you live and work abroad on April 15, 2027, the automatic extension moves the filing date to June 15, 2027, but interest runs from April 15.
- Attach Form 8854 and file it by the return's due date, including extensions. The instructions also note that an FBAR and Form 8938 may still be due for the part of the year you were a US person. Omitting the form can make you covered below the dollar thresholds and bring a $10,000 penalty.
- Plan for follow-up filings if you deferred tax, hold eligible deferred compensation, or benefit from a nongrantor trust; each triggers an annual Form 8854.
- If you are behind, fix that first. IRS relief procedures for certain former citizens have existed since September 2019 — see our guide to the streamlined filing compliance procedures.
For Daniel the arithmetic ends with $1,105,000 of taxable income on a dual-status return, a Form 8854 reporting $3.43 million of net worth, and about $254,000 due by April 15, 2027. For a reader in Rome with $1.8 million, clean filings and modest US tax, the same process ends with a Form 8854 and nothing to pay.
Sources
Primary sources (accessed October 13, 2026)
- IRS, Revenue Procedure 2025-32
- IRS, Expatriation tax (last reviewed October 4, 2026)
- 26 U.S. Code §877A, via Cornell LII
- 26 U.S. Code §877, via Cornell LII
- 26 U.S. Code §2801, via Cornell LII
- IRS, Automatic 2-month extension of time to file
- IRS Notice 2009-85, Guidance for Expatriates Under Section 877A
- IRS, Instructions for Form 8854 (2025)
- IRS Publication 519 (2025), chapter 6
Secondary sources, mainly for Italian domestic rates and for the renunciation-fee final rule where a Federal Register or Gazzetta Ufficiale text was not directly retrieved (accessed October 13, 2026): Euroconference News and professional Italian tax commentary on the 2026 IRPEF brackets; Notaionline on the 26% substitute tax and revaluation rate on SRL quotas; an Agenzia delle Entrate ruling on inheritance tax rates; and Associated Press/Greenback Expat Tax Services reporting on the renunciation fee reduction.
A note on method: this article is general information, not tax, legal, or immigration advice, and Daniel is a fictional persona built to illustrate how the rules interact. The 2026 covered-expatriate thresholds, the mark-to-market exclusion, the rate schedules and the section 2801 annual threshold were checked against Revenue Procedure 2025-32; the covered-expatriate tests and Form 8854 penalty against the IRS expatriation tax page; the deemed-sale, retirement account, foreign pension, deferral, allocation and step-up rules against 26 U.S.C. §877A and IRS Notice 2009-85; and the long-term resident definition, section 2801 mechanics and Form 8854 filing rules against §877, §2801 and the Instructions for Form 8854. Two points remain genuinely open rather than merely unchecked: whether the §121 principal-residence exclusion applies to a deemed sale under §877A, and whether Italian law offers any credit for a prior US exit tax against a later Italian capital-gains assessment on the same assets. Inflation-adjusted US thresholds and Italian budget-law rates change every year and should be reconfirmed before you rely on them.