Filing US Taxes Abroad While Living in Italy

US Taxes Abroad Italy

How Working in Italy Impacts US Taxes Abroad

If you choose Italy as your home abroad, how will it affect the way you approach your US expat taxes? With a fantastic food culture, picturesque landscapes, and a festive social atmosphere, Italy is a popular destination for tourists and expats alike.  As an American, how will living as an expat in Italy affect the way your income is taxed both at home and abroad?

US Expat Taxes in Italy

If you are a citizen or permanent resident of the United States then you are obligated to file US taxes with the IRS each year no matter what country you live in.  And in addition to the regular income tax return, you could also be required to file an informational return on your assets held in foreign bank accounts with FinCEN Form 114 (formerly Form 90-22.1).

While the US taxes the international income of its citizens and permanent residents who reside overseas, it does have special provisions to help protect them from double taxation including:

  • The Foreign Earned Income Exclusion allows you to decrease your 2019 taxable income by the first $105,900 earned as a result of your labors while a resident of a foreign country. You can exclude $107,600 on your 2020 tax return.
  • The Foreign tax credit could lower your tax bill on your remaining income by certain amounts paid to a foreign government
  • The Foreign Housing Exclusion allows for an additional exclusion from income for certain amounts paid for household expenses that occur as a consequence of living abroad.

With proper planning and quality tax preparation, you should be able to take advantage of these and other strategies to minimize or even eliminate your US expat taxes.  Please note that even if you do not believe you will owe any US income taxes, you will more than likely still be required to file a return.

Who is an Italian Resident for Tax Purposes?

In Italy, you are considered a resident if, for the greater part of the tax year (more than 183 days), you meet any one of the following requirements:

  1. You’re registered with the Resident Population in Italian records, or
  2. You’re considered domiciled in Italy by the Italian Civil Code – that is, you’ve established a principal center of business and interests, or
  3. You’re considered a resident in Italy by the Italian Civil Code, meaning you’ve established an abode in Italy

Italy Income Tax Rates

Income earned in Italy is taxed on a national level at progressive tax rates.  For 2019, the tax rates in Italy are as follows:

Income in Euros (EUR – €) Rate Applicable to Income Level (%)
1-15,000 23%
15,001 – 28,000 27%
28,001 – 55,000 38%
55,001 – 75,000 41%
75,001 and above 43%

Income tax must also be paid at regional and municipal levels.  The regional tax will range from 1.2%-2.03%.  The municipal tax will range from 0.1% to .8%, depending on the municipality.

There are deductions in place that can be applied to your income.  These include the following:

  • Charitable contributions (as recognized by Italian law)
  • Family allowances
  • Social security contributions
  • Alimony paid
  • 19% of medical expenses over €129.11
  • 19% of interest paid for loans for real estate (principal residence only, limited to €4000)
  • 19% of secondary tuition expenses

Capital gains, interest and non-qualified dividends are taxed at a flat rate of 20% in Italy.  Qualified dividends and capital gains (i.e. an investment of more than 25% in an unlisted company) are subject to the ordinary tax rate on 49.7% of their amount.

US-Italy Tax Treaty

The US-Italy tax treaty is in place to reduce double taxation of both Italian citizens in the United States and Americans living in Italy. The treaty is critical to understanding which country’s taxes should be paid. If you do not understand a specific situation, it is recommended that you get in touch with a tax advisor to ensure the correct country is paid the correct taxes.

Italy Tax Due Date

Most Italian income will be taxed at the source and if you do not have other income to report to the Ministry of Finance, you will not be required to file a tax return.  In the event that you do need to file “Modello 730” (federal return for employees), you must submit it to The Ministry of Finance. It is due between the 1st of May and the 30th of June.  If you owe taxes, 40% of the payment is due on the 31st of May, with the remaining 60% due no later than the 30th of November.

Italy does not offer extensions for its taxpayers, and the penalties can be quite steep. If a taxpayer files more than 30 days late, the penalty ranges from 120-240% of the taxes due.

Social Security in Italy

Both employers and employees are responsible for contributing to Italy’s social security.  Employers will generally withhold the necessary contributions from the employee’s pay.

The US-Italy Totalization Agreement is an agreement relating to social security for dual-citizens. It means that social security taxes are paid in respect to residency, duration of time spent in either country, the location of your employer, as well as your presumed future intentions.  In some cases, you choose between paying into either Italian or American Social Security.

Is Foreign Income Taxed Within Italy?

If you are considered a tax resident in Italy, you are going to be taxed on your worldwide income.  If you are not considered a tax resident in Italy, you will only be taxed on income that is Italian sourced.

Reporting Requirements

The Italian Tax Authority requires expats to report all assets held outside the country, including savings accounts and property. If you hold assets outside of Italy, you must file a monitoring return form along with your Italian tax return, which is due September 30 each year. In addition, all investment or cash transfers in and out of the country must be reported. At the present time there is no plan to tax the assets or transfers, but failure to file the monitoring form may result in stiff penalties.

Other Taxes in Italy

In addition to income tax, there are other forms of taxation in Italy.

Non-cash compensation is considered taxable, though at different levels.  A company car, for example, has value calculated by the Italian Car Associated (ACI) in order to determine the cost to run the car per kilometer.  Other non-cash compensation, such as housing, is treated like normal income.

Italy has taxes on real estate that vary on the value of the real estate property and the tax rate of the municipality in which it is located. The tax rates range from .2% to .76%

Inheritance tax comes and goes in Italy, and currently there is no inheritance or gift taxes in Italy.

Questions About Your US Expat Taxes in Italy?

Be sure to know these important dates for your US expat taxes. If you have any questions about your US expat taxes or would like to learn about our expat tax services, please contact us.

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