What US Expats Need to Know About Taxes in Italy
- Living as an Expat in Italy
- Italy at a Glance
- US Expat Taxes in Italy
- Who Has to File Taxes in Italy?
- Who Qualifies as a Resident in Italy for Tax Purposes?
- What Types of Taxation Does Italy Have?
- What Tax Forms Do Americans Living in Italy Have to File?
- Does the US Have a Tax Treaty with Italy?
- Does the US Have a Totalization Agreement with Italy?
- Navigating Tax Compliance for US Expats in Italy
Living as an Expat in Italy
Americans have a love affair with Italy. American expats are attracted by Italy’s food, culture, history, and landscapes. Movies like ‘Roman Holiday’ and ‘Under the Tuscan Sun’ have romanticized life in Italy. In moving to Italy, you need to be aware of how taxes apply to you in Italy. Let’s review what a US expat needs to know about taxation in Italy.
Italy at a Glance
- Primary Tax Forms: Modello 730 or Modello Redditi PF
- Tax Year: January 1 – December 31
- Tax Deadline: Modello 730 (September 30) or Modello Redditi PF (November 30)
- Currency: Euro
- Population: More than 58 million
- Number of US Expats: Estimated over 15,000
- Capital City: Rome
- Primary Language: Italian
- Tax Treaty with US: Yes
- Totalization Agreement with US: Yes
US Expat Taxes in Italy
US expats in Italy need to be aware of two different national tax systems. First, virtually all US citizens are required to file an annual US Federal tax return, regardless of whether they live in the United States or Italy.
Second, by living in Italy, American expats also can be subject to Italy taxation. These two national tax systems can create confusion for Americans living abroad in Italy, as they potentially can be subject to tax liabilities in both jurisdictions. Here’s an overview of how the Italy tax system affects US expats living abroad in Italy.
Who Has to File Taxes in Italy?
If you are living in Italy or planning to move there, it’s important to understand how taxes work for both residents and non-residents. In Italy, tax residents are subject to income taxation on their worldwide income, which means that they must declare and pay taxes on all income sources, including foreign income.
On the other hand, non-residents of Italy, for tax purposes, are only taxed on income produced in Italy, such as wages earned by working in Italy or income from Italian investments. This means that individuals who do not have permanent residence in Italy or do not spend more than 183 days in Italy in a year may be considered non-residents for tax purposes.
It’s worth noting that even if you are a non-resident for tax purposes, you may still be required to file a tax return in Italy if you have income generated in the country. Additionally, if you are a non-resident and you own property in Italy, you may be subject to property taxes.
Who Qualifies as a Resident in Italy for Tax Purposes?
You are considered a resident in Italy for tax purposes if you have been for more than 183 days during the tax year and qualify in one of the following categories:
- You are registered in the Records of the Italian Resident Population. An individual who moves to Italy must apply for registration with the Record of the Italian Resident Population in the municipality where the individual intends to reside;
- You have a residence (generally meaning you have established a habitual abode) in Italy; or
- You have a domicile (generally meaning that you have established a principal center of business, economic, and social interests) in Italy.
An individual who moves out of Italy must “de-register” with the Record of the Italian Resident Population. Failure to do so can unnecessarily result in the individual being treated as an Italian tax resident for more than 183 days and more adverse taxation on worldwide income in Italy.
What Types of Taxation Does Italy Have?
National Income Tax
Italy will tax the income of Americans living abroad in Italy at graduated rates based on the following:
|Taxable Income||Tax Rate|
|Up to 15,000 Euros||23%|
|15,001 – 28,000 Euros||25%|
|28,001 – 50,000 Euros||35%|
|More than 50,000 Euros||43%|
There is an additional 10% tax on the net amount of certain “variable compensation” less base salary. This “variable compensation” relates to a bonus, stock option, or incentive plan paid to an executive or manager in the financial sector.
Regional Income Tax
American expats in Italy are also subject to regional income taxation. Regional income tax rates range from 1.23% to 3.33%, depending on the applicable region of residence.
Municipal Income Tax
In addition, Americans living abroad in Italy can be subject to municipal income taxation. Municipal income tax rates range from 0% to .9%, depending on the applicable municipality of residence.
Italy imposes a value-added tax on the supply of goods and services in Italy. The standard value-added tax rate is 22%. However, certain specific supplies of goods and services are subject to lower rates (for example, 4% for listed food, drinks, and agricultural products) or even exemptions (such as hospital and medical care, education, and insurance services).
Residents for tax purposes in Italy are subject to a wealth tax on both real estate properties and financial investments owned outside of Italy. For real estate properties owned outside of Italy, the applicable tax rate generally is .76% of the value of the real estate. For financial investments owned outside of Italy, the applicable tax rate generally is .2% of the value of the financial investments
There is an inheritance tax in Italy, with a specific tax rate and applicable exemption dependent on the beneficiary’s relationship with the deceased person. For example, for inheritances by a spouse or direct line relatives, the inheritance tax is assessed at 4% of the value of the inherited assets above an exemption amount of 1 million Euros (per heir).
Property taxes are assessed on real estate owned in Italy. The primary property tax rates are 0.5% for a principal home and 0.86% for another real estate purchase.
Corporate entities in Italy are subject to two standard taxes.
There is a corporate income tax (known as “IRES”). The IRES tax base is the worldwide income of an Italian resident entity or the Italian source income of a non-resident entity. The standard IRES tax rate is 24%.
There is also a regional production tax (known as “IRAP”). The IRAP tax base varies depending on the nature of the business of the Italian entity. As an example, for sales and manufacturing companies, the IRAP tax base is generally represented by the company’s gross margin in its financial statements. IRAP is assessed on a regional basis. The standard IRAP tax rate is 3.9%, but regions can increase or decrease the standard IRAP tax rate up to .92%.
What Tax Forms Do Americans Living in Italy Have to File?
As an American living in Italy, it’s important to understand your tax obligations both in Italy and the United States. Along with filing your taxes in Italy, you must also file tax forms with the IRS in the United States. Failure to do so may result in penalties and legal consequences.
The primary tax form that you must file is the IRS Form 1040, which is the Individual Income Tax Return. This form is used to report your worldwide income, including income earned in Italy. You must report all income, including salary, wages, tips, interest, dividends, and rental income. If you are self-employed or own a business, you must also file additional forms, such as Schedule C.
In addition to the IRS Form 1040, you must also file the IRS Form 8938, which is the Statement of Specified Foreign Financial Assets. This form is used to report your ownership of foreign financial assets, such as bank accounts, securities, and investments if their value exceeds certain thresholds. Failure to report these assets can result in significant penalties.
Furthermore, Americans living in Italy are required to file the Financial Crimes Enforcement Network (FinCEN) Form 114, commonly known as the FBAR. The FBAR is used to report foreign bank and financial accounts that exceed $10,000 in aggregate value at any point during the calendar year.
It’s important to note that these forms must be filed annually, and the deadlines may vary depending on your circumstances.
Does the US Have a Tax Treaty with Italy?
Yes, Italy and the United States have a tax treaty. The tax treaty aims to prevent double taxation, which can occur when the same income is taxed in both countries.
Under the tax treaty, US expats living in Italy can claim various tax benefits, such as exemptions and credits, that can help reduce their tax liability in the United States. For instance, the tax treaty allows for the exclusion of certain types of income from US taxation, such as pensions, annuities, and social security benefits.
Moreover, the tax treaty provides guidelines for determining which country has the right to tax specific types of income. For instance, if you are an American expat living in Italy and earn income from a US-based employer, the tax treaty will help determine which country has the right to tax that income.
Does the US Have a Totalization Agreement with Italy?
Yes, Italy and the United States have a totalization agreement. A totalization agreement between two countries is designed to eliminate dual Social Security taxation for individuals who work in both countries during their careers. It also enables dual coverage under the Social Security systems of both countries for the same work period.
For Americans who live and work in Italy, this agreement provides significant benefits. Firstly, the totalization agreement eliminates the need for individuals to pay Social Security and Medicare taxes in both countries simultaneously. Instead, they are only required to contribute to the system of the country in which they are currently working.
Secondly, the agreement enables dual coverage under both the US and Italian Social Security systems. This means that individuals can count their work periods in both countries towards their eligibility for Social Security benefits. It simplifies the process of claiming benefits, as individuals can apply for their benefits from the country in which they reside.
Navigating Tax Compliance for US Expats in Italy
Thank you for reading our guide on Italy’s tax system and its impact on American expats. We hope you found it informative and helpful. Should you have further questions or require additional assistance, our team of expat tax experts is always available to assist you.
Contact us, and one of our customer champions will gladly help. If you need very specific advice on your specific tax situation, you can also click below to get a consultation with one of our expat tax experts.