US Expat Taxes Explained: Filing Taxes as an American Living in Italy
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, in this case US expat taxes, with the IRS each year regardless of the country in which you reside.
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 Foreign Bank and Other Account Reporting (FBAR) Form 114, in addition to Form 8938 Statement of Specified Foreign Financial Assets.
While the US is one of the few governments that tax the international income of their 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 taxable income on US expat taxes by the first $108,700 for 2021 ($107,600 for 2020) earned as a result of your labors while a resident of a foreign country.
- The foreign tax credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar, and
- The foreign housing exclusion, which allows you to exclude certain household expenses that occur as a result 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. For more information, see US Expat Taxes Explained.
Who is an Italian Resident?
In Italy, you are considered a resident if for the greater part of the tax year (more than 183 days) you are:
- Registered with the Resident Population in Italian records.
- Considered domiciled in Italy by the Italian Civil Code
- Place where the person has established principal center of business and interests
- Considered resident in Italy by the Italian Civil Code
- Place where the person has established an abode
If you meet any of the above requirements, you are considered a resident for tax purposes.
Italy Income Tax Rates
Income earned in Italy is taxed on a national level at progressive tax rates. The tax rates in Italy are as follows:
|Income in Euros (EUR – €)||Rate Applicable to Income Level (%)|
|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 .9 to 1.4%. The municipal tax will range from 0% 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 are taxed at a flat rate of 12.5% in Italy.
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. Late filing is subject to 15% of the total taxes due if within 30 days. If a taxpayer files more than 30 days late, the penalty ranges from 120-245% 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.
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 .4% to .7%
Inheritance tax comes and goes in Italy, but is it currently in place at the rates are 4%, 6%, and 8%. The reduced rates are in place for gifts to family members.
Saving on US Expat Taxes
Italy’s tax structure is similar to the structure in place in the United States, but it is still important to be aware of what is required to file. Once you’ve taken care of your obligations in Italy, be sure to apply all of the exclusions, deductions, and credits to your US expat taxes. While Italy is not a country with low taxation, being aware of your tax responsibilities will keep paying taxes more manageable. If you have any questions about your US expat taxes, please contact our expat tax experts.