# Taxes for US residing in Italy



## gtyrl

My wife and I are planning to retire to Italy in two to three years, and would like to better understand the taxes we must pay to Italy for worldwide income (solely USA) and assets---investments and Italian residence. Can any of you point me to link or links related to this subject? Thank you.


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## NickZ

The way things change not much point this far in advance.

Investment income is currently taxed at 26% except for Italian government bonds which are 12.5%. I don't know if this applies to US bonds.


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## gtyrl

Thank you, Nick. I understand tax codes and rates will likely change before our move, but understanding current rules and rates will assist in planning financially.


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## BBCWatcher

OK, here are the basic principles for U.S. citizens (I assume) retiring in Italy, in no particular order.

1. Yes, you'll file an income tax return and a financial reporting form (Form RW) in Italy. You will pay estimated income taxes (if any) to Italy, though on a different schedule than in the U.S. (where you will also continue paying estimated taxes quarterly). You will also continue filing U.S. income tax returns, and you likely will start filing U.S. FinCEN Form 114 ("FBAR"), analogous to Italy's Form RW.

2. U.S. source income is taxed first in the U.S. Sometimes the U.S.-Italy tax and/or social security treaties will mean that's the only income tax you'll pay on that income. For example, U.S. Social Security retirement benefits are only taxable (if at all) in the U.S. _unless_ the recipient is a dual citizen (U.S. and Italy), in which case those benefits are then only taxable in Italy.

3. Likewise, Italian source income -- presumably you won't have much of that -- is taxed first in Italy.

4. You then would apply Foreign Tax Credits in both directions unless the income is treaty-protected. For example, if you receive 1000 euro of interest on your Italian bank account, you'd pay Italian income tax (if any) on that 1000 euro first. Let's suppose for sake of argument that's 100 euro in Italian income tax. That 100 euro then can be reported on your U.S. tax return (usually the next year's) as a Foreign Tax Credit to offset some or all of the U.S. income tax you might owe on that 1000 euro of bank interest or on other passive income. It also works the other way, too -- Italy has a foreign tax credit, so the U.S. income tax you pay first on your non-Italian income is creditable against the Italian tax you would owe on that income.

5. If you have any earned income (income from work) -- probably not, but you never know -- you have the option of taking the U.S. Foreign Earned Income Exclusion and Foreign Housing Exclusion to shield at least some of that earned income from U.S. income tax. However, since Italy generally has a higher rate of income tax than the U.S., you'd probably be better off skipping the FEIE/FHE and taking only the Foreign Tax Credit (FTC).

6. If you have earned income you must either contribute into the Italian social security system or the U.S. social security system, but you don't have to contribute into both since there's a social security treaty between the two countries. The treaty decides which system is yours for your particular type and location of work. If you contribute into the Italian system, even for a relatively short period of time, you may become eligible to receive benefits from that system.

7. Italy has a modest wealth tax. Unless the tax treaty says otherwise, you'll pay a rate ranging from 0.2% to 0.76% (current rates) on your wealth held outside Italy, less certain allowable foreign taxes.

8. The U.S.-Italy tax treaty _generally_ respects the U.S. treatment of U.S. tax-advantaged accounts such as 401(k)s and IRAs, but you will need to check those details carefully since they vary.

9. Italy generally has a low rate of estate/inheritance/gift taxes, so U.S. tax considerations will likely predominate in that area. (Not that the U.S. is bad either.) It's worth investigating the Italian implications if you plan to accumulate some amount of wealth in Italy, at least to make sure those assets pass to the persons you wish to receive them.

10. I do not recommend accumulating any Italian (or other non-U.S.) financial assets except ordinary bank/credit union accounts, direct holding of government and/or corporate bonds (such as Italian postal saving bonds if those interest you), fixed deposits/CDs at banks/credit unions, and direct holding of stock in publicly traded banks and/or insurance companies. Anything else _might_ run afoul of PFIC (Passive Foreign Investment Company) complications with the U.S. IRS. that are, I think, best avoided.

11. Any time you have two more countries involved in tax and financial filings it can get complicated, and these two (U.S. and Italy) would be complicated, especially the first year or two. Consequently it's probably a good idea to hire somebody who knows what they're doing on both sides of the Atlantic to assist you with your tax and financial filings. Once you've got a year or two behind you you might then file on your own.

The major accounting firms -- think KMPG, Deloitte, Ernst & Young, etc. -- publish introductory guides on Italy's tax system. You can find those reports using your favorite Internet search engine. Tax rules can change, so make sure you're keeping abreast of those changes and reading the most recent available reports. If you like a particular firm's reports you might decide to hire that firm to help with your filings, but that's optional.

12. Italy has a high rate of VAT and is quite sensitive to your selling goods and services without collecting and paying VAT to the government. If you decide to grow cucumbers in your garden and sell them from a vegetable cart in front of your house, you would need to be collecting VAT, for example. Be careful about selling things on eBay, as another example. Consignment shops can likely handle these complications for you, so that'd be one reason to use them. The U.S. is much more casual about this sort of thing, so just be a bit careful and check the rules before you engage in any sort of commerce.

That's a start. Hope it helps.


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## gtyrl

Thank you very much for this comprehensive account of the different taxes that may come into play, levied by Italy and the US. I will definitely search out the introductory guides related to Italy's tax system.


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## Jackster

*US retirement income question*

Hi BBCWatcher. Great explanation. I have been living in Italy for 1 1/2 years and will be for the foreseeable future. I'm finding a lot of tax-related information regarding U.S. retirees living in Italy on U.S. Social Security benefits, 401k's, etc. I don't fall under any of that. My retirement income is from the State of Alaska. That is my only source of retirement income. I pay U.S. taxes on that retirement income, have zero income earned in Italy, nor any interest earned on my bank account, no investments in Italy, etc. Pretty simple. I'm assuming I will have to file a Form RW in Italy, but I was wondering if you have any idea how Italy handles this type of U.S. retirement income that is fully taxed in the U.S. Thanks much.


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## accbgb

Jackster - can you add to the above, whether your citizenship is US only, or dual US/Italy? If US only, are you in Italy on an Elective Residency visa?


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## BBCWatcher

Yes, your citizenship status may have an impact.

The U.S.-Italy tax treaty should tell you exactly what to do for that type of income, what sounds like a government service pension. That sort of income is almost always mentioned in tax treaties the U.S. signs. Look at both the treaty and the "technical explanation."

Yes, Form RW is likely. Do not forget that one. Penalties are still quite steep if you fail to file that form or file too late.

Even though you might not owe income tax in Italy you might owe a bit of wealth tax -- that's fairly common for retirees especially. Check the treaty to see if you can get any wealth tax relief, too.


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## Jackster

Hi BBCWatcher and accbgb. Thanks for your replies. I am a U.S. citizen (no Italian citizenship) living in Italy with an "elective residency" Permesso di Soggiorno. I will read the treaty, although I'm not sure I will be able to understand exactly what it all means. I was not aware of a "wealth tax." I see from your previous post that you mentioned being taxed on "wealth outside of Italy." If you have time, can explain just what that is? It sounds like I might need to use the services of a tax specialist to compute just what it is that I might owe in taxes to Italy.


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## BBCWatcher

The wealth taxes are IVIE and IVAFE, for reference.


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## Terrycolby

*More on tax*

I am confused! I get different answers from govt agencies and commercialistas. I am a U.S. citizen with an elective residency visa. My only income is soc. sec., a small federal govt. pension which covers my health and life insurance payments and a little extra and 10% veterans disability. I own nothing in the states or here. I owe no taxes in the U.S. Am I supposed to file in Italy also? I have been told no but then told I need italian tax returns when I apply for my long stay visa after five years in the EU.


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## BBCWatcher

You likely have to file Form RW, a foreign financial account reporting form. Please check that.

You probably do not owe any income tax in Italy, but you are correct that you may need tax returns to apply for an EC Long Term Residence Permit. Consequently it may be in your interest to file tax returns even if you are not required to do so. If you file (or are required to file) most likely you'd report all your income then immediately claim tax treaty exemptions on that income (since it's likely the U.S.-Italy tax treaty shields your income from Italian taxation).


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