Moving From the US With Vested Equity: The Trailing-Tax Problem

An Australian engineer works in San Francisco for six years on an L-1 then a green card. She accumulates $800K of unvested RSUs and $300K of exercised ISOs she is holding. She moves back to Sydney permanently in 2026, abandoning her green card.

Two US tax problems follow her home. First, the §877A expatriation tax: a mark-to-market tax on worldwide unrealized gain at the date of expatriation. Second, trailing nexus on equity sourced to US work: RSUs that vest after her return are partly US-source income (for work done in the US during the vesting period), and the US can tax that portion for up to several years.

Both claims are real. Both are often handled incorrectly by preparers in either country. A clean departure requires advance planning; a messy departure produces years of amended returns, penalties, and unrecovered tax.

Section 877A: the expatriation tax

IRC §877A applies to “covered expatriates” who:

1. Renounce US citizenship, or
2. Abandon US long-term resident (LTR) status (green-card holder for 8 of the last 15 years).

A “covered expatriate” is someone who:

• Has net worth above $2 million at expatriation, OR
• Had average annual net income tax liability above $206,000 (2025 threshold, adjusted annually) for the preceding 5 years, OR
• Fails to certify tax compliance for the preceding 5 years.

Effect: all worldwide assets are treated as sold for FMV on the day before expatriation. Gain above $866,000 (2025 exclusion) is taxed at normal rates (long-term or short-term depending on holding period).

For equity holders:

• Vested stock: FMV gain over basis is recognized as capital gain.
• Unvested RSUs: treated as “deferred compensation items” under §877A(d). Can elect to pay the tax at expatriation or defer until actual vesting (with US withholding on each vest).
• Options: vested options are treated as sold; unvested options are deferred comp items.
• ISOs and ESPP: treated as stock for expatriation purposes once exercised.
• IRA and 401(k): not mark-to-market; distributions continue to be US-taxable.

Covered expatriates pay the exit tax at regular rates. Long-term capital gains on stock at 23.8% federal plus state if applicable.

The deferred compensation election

For unvested RSUs and other deferred comp, the expatriate can:

1. Pay the exit tax now (mark to market), or
2. Defer US tax until actual vest, with 30% US withholding on each future distribution (§877A(d)(1)).

Deferral election requires:

• Waiver of treaty benefits on the deferred comp.
• Security interest to the IRS (bond or other collateral).
• Irrevocable election.

Most expatriates defer rather than pay upfront, but the cost is the 30% flat withholding on future vests, which for a moderate-income expat in Australia (where marginal rate is 45%) means some recoverable credit at Australian tax filing.

Trailing US tax on equity sourced to US work

Separate from §877A, the US retains taxing jurisdiction on income sourced to US work, even after the worker leaves.

For RSUs vesting after departure:

• The portion of the vest attributable to US work periods is US-source income.
• The US taxes that portion at nonresident alien rates (typically 30% flat without treaty relief).
• Treaty (if any with home country) may reduce the rate.

For stock options exercised after departure:

• Sourcing is based on work location during the grant-to-exercise period.
• Spread at exercise is compensation income; US-source portion is subject to US tax.

For ISO stock sold after departure:

• The gain over exercise price is capital gain. Generally, if the taxpayer is now a non-resident alien at sale, US does not tax capital gain on foreign-situs stock (stock of US company is usually considered US-situs but is treated specially under §§865(g) and similar).

In practice: capital gains on US stock by an NRA former resident are often not US-taxable (except US real property and certain other categories under §897). But ordinary compensation income embedded in vest events remains US-source and taxable.

Example sequence

Australian engineer, LTR, departs US Dec 31 2026. Unvested RSUs: 2,000 shares vesting Jan 2027, 2,000 vesting Jan 2028, 2,000 vesting Jan 2029. Grant date: Jan 2024, so each tranche has a 3-year vest to Jan 2027 and subsequent dates.

Vesting period analysis:

• Jan 2027 vest: 3 years, all US work. 100% US-source.
• Jan 2028 vest: 4 years, 3 in US + 1 in Australia. 75% US-source.
• Jan 2029 vest: 5 years, 3 in US + 2 in Australia. 60% US-source.

If she defers under §877A and does not pay exit tax on these RSUs:

• Jan 2027 vest: US-source ordinary income $X; 30% US withholding. Australian tax on same $X at Australian rates; FTC for US tax paid.
• Jan 2028 vest: 75% of $Y is US-source; US withholds 30% on that portion; Australia taxes 100%; FTC for US portion.
• Jan 2029 vest: 60% of $Z is US-source; same pattern.

Three years of US tax filings as an NRA plus Australian filings with reconciliation. Several cross-border tax returns.

California and other states

State-level trailing obligations compound the federal issue. California enforces the strictest trailing nexus for equity compensation:

• California taxes the portion of RSU and option income attributable to California work periods, forever.
• Moving from CA to another state does not eliminate California’s claim on the CA-source portion.
• Moving from US to abroad does not eliminate it either.

A former California resident returning to Australia still owes California tax on CA-source equity income vesting years later. This is tracked in most cross-border plans but often missed by the taxpayer until CA sends a notice.

New York has similar (slightly less aggressive) rules. Most other states do not have the same trailing reach.

Comparison: types of US tax that can follow you home

Tax	Applies after departure	Rate	Recoverable via treaty?
§877A exit tax	Once, at expatriation	Normal capital-gain rates	Partially, depending on treaty
Federal income on US-source trailing comp	Each year income is earned	30% flat (or treaty)	FTC home side
FICA on US-source trailing comp	At vest if applicable	7.65% + Medicare	Only via totalization
State tax (CA, NY)	Each year	State rates	Rarely; most states don’t give credit
PFIC tax on foreign funds held	If bought post-departure	Harsh	No

Planning moves before departure

For an expatriate with significant equity:

1. Time the departure. Vest as many RSUs as possible before departure. Exercise vested ISOs/NSOs if strategically sound. Sell stock before departure to lock in basis and US treatment.

2. Consider relinquishing green card early. If LTR status is imminent (year 7-8), some taxpayers relinquish before becoming LTR to avoid §877A. This is a significant personal decision with immigration consequences.

3. Document workday history. Keep a log of days worked in each country. Needed for sourcing allocation of trailing vests.

4. Coordinate with home-country advisors pre-departure. Home-country tax treatment of US-sourced deferred comp often requires specific planning.

5. File Form 8854. This is the expatriation notification form; filing is required for covered expatriates.

6. Consider charitable gifting. Appreciated stock gifted before expatriation to US-qualified charities can reduce both net worth for §877A purposes and eventual taxable gain.

Frequently asked

I’m not a green-card holder but lived in US 7 years on H-1B. Does §877A apply? No. §877A applies to citizens and LTR green-card holders only. H-1B visa holders on departure are not subject to exit tax.

If I pay the exit tax, do I still owe US tax on post-departure vests? Depends. If you paid exit tax on the full FMV of unvested RSUs (elected not to defer), no further US tax on those vests. If you deferred, US tax applies at each vest.

Does my home country tax the exit-tax amount I paid in the US? Depends on the home country’s treaty treatment. Most treaties allow FTC for US exit tax against home-country tax on the same assets, but timing and category matching are tricky.

What about the house I own in the US? US real property remains US-taxable under §897 regardless of residency status. Selling as NRA triggers FIRPTA withholding.

Can I avoid trailing tax by exercising all options before leaving? Exercise without sale creates AMT exposure (for ISOs) but eliminates the vest-timing sourcing issue. Sale before departure eliminates trailing tax on those shares entirely. Cost: current-year tax.

Next step

If you are planning to leave the US with significant unvested or vested equity, build a cross-border tax projection 6-12 months before departure. Identify which shares would be better sold or exercised before departure and which are better deferred. Engage home-country and US cross-border counsel jointly. File Form 8854 and track your Form 1040-NR filings for each post-departure year with trailing income.