Many American citizens and green card holders have been captivated by Italy’s beautiful landscapes, incredible history, fantastic food, and rich culture. If you are one of them and you choose to call the European country home, you must remember you must file a U.S. federal tax return regardless of where in the world you live, or your income is generated. To avoid any trouble with the IRS, it is fundamental to know how living in Italy as an American expat affects your taxes. Below, the expat tax attorneys at Evolution Tax and Legal are breaking down some taxes for Americans living in Italy.
U.S. Expat Taxes in Italy
If you are a U.S. citizen or permanent resident living in Italy, it is essential to know your duties and rights before the IRS to prevent penalties and double taxation. At first, you should know that your tax returns are still due on April 15th, but expats get an automatic filing extension until June 15th, which can be extended further until October 15th.
When preparing your tax returns, you must file form 1040 if your annual income is more than $12,550 in 2021. This threshold is just $400 for self-employed individuals and $5 for Americans married filing separately with a foreigner. Moreover, if you have financial assets registered outside the U.S. worth over $200,000 per person, you also need to file Form 8938 to declare them. Along with the required regular federal tax return, those who held $10,000.00 or more at any time in the year in their accounts also need to file an informational return on their assets held in foreign bank accounts with FinCEN Form 114 – also known as the Foreign Bank Account Report (FBAR).
Fortunately, there are three standard provisions which Americans living in Italy can use to reduce their U.S. tax bill. The Foreign Earned Income Exclusion allows you to decrease your 2021 taxable income by the first $108,700 earned for your labors while a resident of a foreign country. Furthermore, the Foreign Tax Credit gives you a dollar tax credit for every dollar of tax you have already paid to a foreign government. Finally, the Foreign Housing Exclusion allows for an additional exclusion from income for specific amounts paid for household expenses due to living abroad.
Italian Income Tax Rates
In Italy, income is taxed on a national level at rates that currently range from 23% to 43%. There are also regional and municipal taxes. The regional tax rates range from 0.7% to 3.33%, while municipal tax rates range from 0.1% to .9%, depending on the municipality. Nationally, the rates are as follows:
|Income in Euros (EUR – €)||Tax Rate|
|75,001 and above||43%|
Charitable contributions, family allowances, social security contributions, alimony, a proportion of medical expenses, some interest paid for loans for real estate (principal residence only), and a proportion of secondary tuition expenses are all deductible.
Who Qualifies as a Resident of Italy?
In addition to the U.S. tax return, American expats living in Italy must also file an Italian income tax return if they qualify as a resident of Italy. This will be the case if, for the more significant part of the tax year (more than 183 days), they are registered with the Resident Population in Italian records; or they are considered domiciled in Italy by the Italian Civil Code – that is, they have established a principal center of business and interests –; or they are considered a resident in Italy by the Italian Civil Code, meaning they have found a residence in Italy.
When Are Italian Taxes Due?
U.S. citizens and green card holders who work in Italy will have their income tax deducted at the source. If this is their only income, they are not required to file a tax return. Expats who need to file should do so between the 1st of May and the 30th of June. If they 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. Also, if they have any assets outside Italy, they must file a monitoring return, though these assets aren’t currently taxed.
Italian penalties are harsh for late filing and payment, and the government does not offer extensions for its taxpayers. If a taxpayer files more than 30 days late, the penalty ranges from 120-240% of the taxes due.
U.S.-Italy Tax Treaty
In addition to the common provisions listed above, the U.S. and Italy have a tax treaty to reduce the double taxation of Italian citizens in the United States and Americans living in Italy. The U.S.-Italy Tax Treaty ensures that no one will pay more tax than the higher of the two countries’ tax rates, and it also defines where taxes should be paid, which generally depends on where the income arises. For income earned in the U.S., Americans in Italy can claim Italian tax credits against U.S. income taxes paid to the IRS. Moreover, to claim U.S. tax credits against Italian taxes paid, expats must file Form 1116 when they file their U.S. federal tax return.
Social Security in Italy
The U.S. and Italy have another agreement in effect relating to social security payments. The Totalization Agreement helps U.S. expats in Italy not pay social security taxes to both the U.S. and Italian governments. The arrangement specifies that taxes for social security must be paid based on residency, total time spent within each country, the employer’s location, and the presumed future plans of the taxpayer.
Does Italy Tax Foreign Income?
You will only be taxed on your worldwide income if you are considered a tax resident in Italy. If that is not your case, you will only be taxed on income that is Italian sourced.
Other Taxes in Italy
There are other forms of taxation in Italy in addition to income tax. Non-cash compensation is considered taxable, though at different rates. For instance, company cars are taxed based on the cost of operating the car, while housing is taxed like regular income. Real estate is also taxed based on the property’s value and the rates set by the municipality where the property is located. The tax rates range from 0.2% to 0.76%.
Besides that, inheritance tax is approved and extinguished from time to time. Currently, there are no inheritance or gift taxes in Italy.
File U.S. Taxes With Evolution Tax and Legal’s U.S. Expat Tax Services
The many aspects of expat taxes for Americans in Italy may overwhelm you, but the Evolution Tax and Legal team provides U.S. expat tax services to help you streamline your tax return process. For help with your expat taxes, contact our team of experts today.