Renounce US Citizenship: How the Exit Tax Works for NRIs

You’ve lived in the US for years, you’re heading back to India, and giving up your US passport is on the table. Before you renounce US citizenship, know that the exit tax hits only covered expatriates, and a missed filing can make you one at any net worth. Here’s how to check.

What the exit tax is when you renounce US citizenship

You're weighing whether to give up your US passport, so the first question is whether you'd be a covered expatriate. The exit tax under Section 877A applies only to covered expatriates, on the date you give up citizenship. If you're not one, you owe none, though you still file Form 8854 to report your expatriation.

The three tests for a covered expatriate

You're covered if you meet any one of three tests in the IRS expatriation tax rules:

• Net worth: $2 million or more on the date you expatriate.
• Tax average: your average annual net income tax for the five prior years is above $211,000, the 2026 figure, which the IRS resets each year.
• Certification: you can't certify on Form 8854 that you met every US tax obligation for those five years.

The first two tests are about money. The third is about paperwork, and it applies at any net worth. A citizen with $600,000 and several years of unfiled Form 8621 for Indian mutual funds can fail it, before the PFIC penalty question even comes up.

That's why I'd check the certification test before the $2 million line.

The deemed sale on the day before you renounce

If you're covered, the IRS treats everything you own as sold at fair market value the day before your expatriation date. That includes US and Indian stocks, mutual funds, and real estate in India. The gain is taxed in the year you expatriate.

For 2026, the first $910,000 of net gain is excluded, so only the gain above it is taxed. Your expatriation date is usually the day you take the oath of renunciation before a consular officer, once the State Department confirms it with a certificate of loss of nationality.

If you can't pay at once, you can elect to defer the tax on specific assets until you sell them. You post security with the IRS, pay interest from the expatriation date, and you can't undo the election.

What the exit tax costs: a worked example

Take Arjun, a naturalized US citizen who has lived in the US for fifteen years and plans to retire in India. On the day before he expatriates in 2026, he holds US stocks worth $1,200,000 (cost $450,000), a flat in India worth $300,000 (cost $120,000, in dollars), a 401(k) of $700,000, and $400,000 in cash.

His net worth is $2.6 million, so the net worth test makes him covered.

Arjun's deemed sale

• Gain on the US stocks: $750,000
• Gain on the Indian flat: $180,000
• Total gain: $930,000
• Less the 2026 exclusion: $910,000
• Taxable gain: $20,000

At a 23.8% combined federal rate, that's roughly $4,800 of exit tax, depending on his situation.

Where the real cost sits

The 401(k) isn't part of the deemed sale. It's eligible deferred compensation, so 30% is withheld from every distribution, and no treaty rate reduces it. On $700,000, that can reach $210,000 over time.

In this example the headline tax is small and the retirement account is the real bill. I'd run that number before anything else.

What follows you after you renounce

If you're a covered expatriate, a gift or bequest to a US citizen or resident, such as your US-born child, is taxed under Section 2801. The rate is the highest US gift and estate tax rate, and it applies once the year's total passes the annual gift exclusion.

The recipient files Form 708 and pays, not you. The rules apply to transfers received from 1 January 2025.

Any US stocks you keep also stay exposed to US estate tax as a non-citizen, and the exemption is small.

Who this applies to

• Naturalized citizens: the exit tax tests apply to you in full when you're giving up US citizenship. The exception for dual citizens needs you to have been a US and foreign citizen at birth, so it doesn't fit someone who naturalized later.
• Green card holders: different rules apply once you've held the card in 8 of the last 15 years, and the green card after moving to India rules decide your exposure.
• Anyone just moving to India: leaving the US triggers no exit tax if you keep your citizenship, but you still file US taxes after returning.

What to do before you renounce

1. Pull your last five years of returns and check every form, including Form 8621 and Form 3520. File anything missing before you renounce.
2. Total your worldwide net worth as of the date you'd expatriate and compare it with $2 million.
3. Estimate the deemed-sale gain on each asset and compare the total with $910,000.
4. Decide what to do with your 401(k) and IRA. If your marginal rate is below 30%, withdrawing before you renounce can cost less than lifelong withholding.
5. Book the consular appointment. The State Department's processing fee fell from $2,350 to $450 in April 2026.
6. File Form 8854 with your return for the year you expatriate. The IRS can charge $10,000 for each year you fail to file it when required.

Your first move

Pull your last five returns this week and check every information form before you book anything. I'd fix any gap first, because a gap makes you covered at any net worth. If you want a second pair of eyes, InvestMates can run the covered expatriate tests with you.