Simple Tax Guide for Americans in Italy
At Taxes for Expats we have been preparing U.S. taxes for Americans in Italy since 1998. We have been checked by the State Department and are listed on the list of approved Tax Preparers by the US Consulate in Rome. Our clients hail from all parts of the country - Rome and Milan, Naples and Turin, Genoa and Sicily (Palermo).
Italy has beautiful landscapes, ancient ruins, amazing food, and a fun social atmosphere. It is no wonder Italy remains a frequent destination for both expats and tourists - many of whom don’t ever want to leave! But, how does living in Italy as an American expat affect your taxes? Read on to find out.
US Expat Taxes - Italy
US citizens, as well as permanent residents, are required to file expatriate tax returns with the federal government every year regardless of where they reside. Along with the typical tax return for income, many people are also required to submit a return disclosing assets which are held in bank accounts in foreign countries by using FinCEN Form 114 (FBAR).
The United States is among only a few governments who tax international income earned by their citizens, as well as permanent residents, residing overseas. There are, however, some provisions that help protect from possible double taxation. These include:
- The Foreign Earned Income Exclusion. This exclusion allows one to exclude USD 101,300 (this amount is for 2016 taxes) in earned income from foreign sources.
- A tax credit allowing tax on remaining income to be reduced based on the taxes paid to foreign governments.
- An exclusion on foreign housing that allows additional exclusions from their income for some amounts paid to cover household expenses due to living abroad.
Preparing a quality tax return following proper tax planning should allow one to use these, as well as other strategies, in minimizing or possibly eliminating tax liability. Note that in most cases the filing of a tax return is required, even if taxes are not owed.
Who Qualifies as a Resident of Italy?
Taxpayers are considered to be a resident of Italy, if for over 183 days they are:
- Classified as an Italian resident (i.e., has an established abode)
- Classified as domiciled in the country (i.e., has an established center of interests and business)
- Registered in the country’s records (i.e., Resident Population)
Meeting any of these requirements makes a person an Italian resident for purposes of taxes.
Tax Rates for Italy
Earned income is taxed in Italy at the national level using progressive rates.
|23%||On||EUR 1 - EUR 15,000|
|27%||EUR 15,001 - EUR 28,000|
|38%||EUR 28,001 - EUR 55,000|
|41%||EUR 55,001 - EUR 75,000|
|43%||Over EUR 75,000|
There is also an income tax at the municipal and regional levels. Municipal tax rates vary by municipality, and are between 0.1% and 0.8%. Regional tax rates range between 1.2% and 2.03%.
There are some deductions available to be applied against income. Some of these include:
- Family allowances
- Charitable contributions
- Contributions to social security
- Alimony paid
- Medical expenses greater than EUR 129.11 (19%)
- Interest paid on principal residence loans (19%, and limited to a maximum of EUR 4,000)
- Tuition expenses for secondary education (19%)
Dividends (non-qualified), interest, and capital gains are subject to a flat tax rate set at 20%. Capital gains and dividends considered “qualified” (i.e., investments of over 25% in a company that is unlisted) are taxed at the regular tax rate (based on 49.70% of the amount).
There is a tax treaty between the United States and Italy. A primary goal of the treaty is to reduce any double taxation on Italians living in the US, and US citizens living within Italy. This treaty is important to understanding where to pay taxes to. Since each situation is different, it is advisable to speak with a knowledgeable tax professional to make sure the proper country gets paid the proper tax amount.
When Are Italian Taxes Due?
The majority of taxes in Italy are paid at the income source. If there is not additional income that must be reported, a taxpayer need not file an annual tax return. If you find you do have to file a “Modello 730” - the employee federal return - it must be submitted between May 1st and June 30th. If taxes are owed, 40% is due by May 31st. The remaining amount must be paid by November 30th.
There are not extensions available in Italy, and penalties for late filing are quite high. If taxes are filed over 30 days past the due date, penalties range between 120% and 240% of any amount due.
Italian Social Security
Contributions must be made to the Italian social security system by both employees and employers. Usually, employers will withhold the proper amount from their employees’ pay.
Italy and the United States have a totalization agreement in place. Taxes for social security are paid based on residency, total time spent within each country, the employer’s location, and the presumed future plans of the taxpayer. In a few cases, a taxpayer can choose which country’s system to pay into.
Self Employed in Italy - Read Carefully!
Like many other western countries, Italy has a Totalization agreement with the US. What this means in plain english is that if you pay into the social security system of the foreign country as a self-employed individual, you do not have to pay into the U.S. system as well Ie - you won’t have to pay Self employment tax.
What makes Italy different, is that this only applies to Italian citizens. Non-citizens of italy must pay into the US Social security system. Exemption from SECA tax for self-employed US citizens/green card holders residing in Italy is granted only to the Italian citizens. Non-citizens of Italy must pay self-employment to the US Social Security system.Most people make contributions to the Italian system (INPS) - to receive social benefits and medical coverage - yet, those contributions cannot be claimed for exemption from US SECA tax - unless the taxpayer is a citizen of Italy.
Does Italy Tax Foreign Income?
Taxpayers who are considered residents of Italy will pay taxes on their income worldwide. Those who are not tax residents of Italy will pay taxes only on their income from Italian sources.
Italian Tax Reporting Requirements
Tax authorities in Italy require that expats report all of their assets that are held outside of Italy, which includes property and savings accounts. If a person has assets outside the country, they are required to file a form with their regular tax return in Italy. Also, any transfers of cash or investments either into or out of Italy are required to be reported. Currently, there is not a tax on these transfers or assets, but not filing the form can result in significant penalties.
As with most countries, there are additional types of taxes in Italy on top of income tax.
Compensation in non-cash form is taxable, but at different rates. As an example, company cars are taxed based on the cost of operating the car, while housing is taxed like regular income.
There are real estate taxes in Italy based on the property’s value and the rates set by the municipality where the property is located. Rates range between 0.4% and 0.7%.
Taxes on inheritance come and go. Currently, no gift or inheritances taxes are in place.
Questions About Italian Taxes?
Contact us! We have an expert team to provide tax advice to expats, and give you all the information you need to know to file your United States expatriate tax return while living outside the country.