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A Tax Guide for Italian Expats in the United States

A Tax Guide for Italian Expats in the United States
Ines Zemelman, EA
27 May 2022

It is not an understatement to say that American culture and history have been heavily influenced by Italy. Waves of Italian immigration to the U.S. in the late 1800s have resulted in one of the largest Italian expat communities in the world.

According to the Census Bureau's 2019 American Community Survey, over 16.1 million Americans reported Italian ancestry. Many of America's largest cities including Chicago, Philadelphia, and Boston boast large Italian-American communities. In fact, New York City is home to the second-largest Italian population outside of Italy.

As an Italian expat, you may have a lot of tax questions before you move to the U.S.: Do I need to pay income tax? What forms do I need to use? What will happen to my assets in Italy?

Here's everything you need to know about taxes for Italian expats in the United States.

Immigrant and non-immigrant tax status

Italians in America fall under two types of U.S. visas: immigrant and non-immigrant. Your tax status will generally depend on the type of visa you hold.

Immigrant visa

Italian citizens who wish to immigrate to the United States are typically granted an immigrant visa. This visa grants permanent residency within the U.S., and many Italian expats obtain an immigrant visa through employment or U.S.-based relatives who are also U.S. citizens or permanent residents.

For Italian expats with an immigrant visa, their tax obligations begin when they enter the country.

Non-immigrant visa

Non-immigrant visas only allow for a temporary stay within the United States. They are granted to students, tourists, researchers, and temporary workers. Diplomats, foreign military personnel stationed in the U.S., and employees of international organizations such as NATO and the UN are also covered by this category.

Non-immigrant visa holders only need to pay income tax on U.S.-sourced income. They also use non-resident tax forms to file a return.

What is a resident alien for tax purposes?

If you possess a Green Card, the IRS considers you as a resident alien for tax purposes. Non-immigrant visa holders may also be considered resident aliens for tax purposes if they meet the Substantial Presence Test

This means that you are covered by the same tax rules that apply to U.S. citizens and permanent residents. It's important to note that Resident Aliens are required to file a U.S. federal income tax return even if they are abroad during the tax year.

Do non-U.S. citizens pay taxes?

Yes! Italian expats need to understand the different types of taxes they may need to pay during their stay in the United States. Here are some of the most important:

1. Federal income tax

The U.S. federal government imposes a progressive income tax based on your income, with 7 tax brackets ranging from 10% to 37%.

2. State income tax

The United States comprises 50 states and the District of Columbia. Each state imposes its own tax rules, and where you decide to live will affect your tax liability. 

Nine states — Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming — have no individual income taxes. New Hampshire currently taxes interest and dividends income but is set to phase out those taxes in 2026.

3. Local income tax

Some cities and counties impose a local income tax on top of the federal and state income taxes. While most local taxes range from 1-2%, some major cities such as New York City charge as much as 3.8%

4. Social Security and Medicare tax

A payroll tax is deducted from an employee's paycheck or paid directly by a self-employed individual to fund Social Security and Medicare programs. The tax is based on your gross income.

Your employer will deduct 6.2% of your gross wages for the Social Security tax and 1.45% for the Medicare tax. They will also match your contributions for a total of 15.3%

If you are self-employed, you will need to pay the full amount. However, you can deduct half of the tax as a business expense.

Italian diplomats and government officials, as well as their families and home employees (e.g. housekeepers, nannies), are exempt from the payroll tax.

Rules for reporting foreign financial assets

If you own foreign financial assets such as foreign bank accounts, investment accounts, and insurance policies, you may need to submit a report to the U.S. Department of Treasury.

The Foreign Bank Accounts Report (FBAR), or FinCEN 114, is filed electronically with the Financial Crimes Enforcement Network, a division of the U.S. Department of Treasury. It is not part of your IRS tax return. 

U.S. citizens or resident aliens who own or have signature authority over foreign financial accounts with an aggregate balance of $10,000 or higher on any given day during the calendar year must file this form. 

The balance on foreign retirement accounts is also counted towards the $10,000 threshold and must be reported. Joint bank accounts with a spouse who is not a U.S. resident must be reported, as well.

Another financial report you may need to file is the Foreign Account Tax Compliance Act (FATCA), or Form 8938. Like the FBAR, this form does not affect your tax liability and only informs the federal government of your foreign financial assets. However, the filing threshold is higher. FATCA is submitted along with your federal tax return.

What will happen to my Italian assets?

Once you become a U.S. resident alien, the proceeds from the sale of your real properties in Italy or anywhere else in the world will be taxed as part of your worldwide income. 

However, you can exclude the first $250,000 of capital gains from U.S. tax if the property meets the IRS-defined criteria of a primary residence.

Make sure to check the relevant tax laws before disposing of your Italian assets.

Does the U.S. give a tax credit for Italian expats?

If you have income earned abroad, you can take advantage of tax credits and deductions to reduce your U.S. tax liability.

For instance, the Foreign Earned Income Exclusion allows you to exclude up to $112,000 (for tax year 2022) in foreign earnings from U.S. income tax. To qualify for this benefit, you must meet the Bona Fide Residence Test or the Physical Presence Test.

You may also take a Foreign Tax Credit to claim an equivalent dollar value of foreign income tax paid to a foreign government.

U.S.-Italy tax treaty

The U.S.-Italy tax treaty allows for improved tax transparency and information sharing between the two countries. This tax treaty prevents double taxation for dual citizens and is also used to resolve possible tax issues.

Filing Italian expat taxes in the U.S.

Immigrating to America comes with huge responsibilities, chief of which are your taxes. It’s important that you familiarize yourself with the U.S. tax code. If you need help with filing your annual tax return, you need to talk to a tax professional.

Ines Zemelman, EA
Founder of TFX