Italy has been one of the most popular tourist destinations praised for its culture, beauty, history, wines and fashion. American expats in Italy are always encouraged to study the Italian language to embrace the culture. However, the most challenging aspect of living in Rome, Milan, Florence or any other city in Italy is to understand the Italian tax system. Taxpayers in Italy might be subject to the following taxes: Personal income tax or National income tax (“IRPEF”), Additional Regional Income Tax (“Addizionale Regionale all ’IRPEF”), Additional Municipal Income Tax (“Addizionale Comunale all ’IRPEF”) and Regional tax on productive activity (“IRAP”). In addition to filing an Italian tax return and paying overseas taxes, American expats Italy are advised to seek US expatriate tax services.
Do you offer US expat tax services for American expatriates in Italy? What are income tax rates for expats in Italy? Should American expats Italy file US expatriate tax returns when they work and pay taxes in Italy?
These are some of the most popular overseas tax questions from our clients in Italy.
Filing Expat Tax Returns for Expats Italy
US citizens and green card holders are subject to the taxation on their worldwide income. Consequently, American expats Italy have to file a US expat tax return even if they do not have any income from the USA. To avoid the double taxation, the USA signed a tax treaty with Italy. American expats Italy should consider the following provisions under IRC 911.
- Foreign income exclusion. American expats Italy can exclude up to $101,300 in a tax year 2016 if they file US expatriate tax returns and have foreign earned income.
- Foreign housing exclusion. Additionally, expats in Italy might deduct qualified foreign housing expenses incurred while living in Italy.
- Foreign tax credit. American expats Italy can take a foreign tax credit and minimize US taxes on a dollar-for-dollar basis.
Additionally, American expats Italy must file the FBAR if they have foreign financial accounts with the aggregate value over $10,000.
Tax system in Italy – FAQ
I am an American expat living in Italy. Is my worldwide income taxed in Italy?
American expats Italy are taxed on their worldwide income if they are considered “tax resident individuals”. “Non tax resident individuals”” are subject to personal income tax only on income from the Italian sources. The personal income tax rate is higher in Italy in the USA so it has a significant impact on filing US expat tax returns.
Who is considered a tax resident in Italy?
An American expatriate is considered a resident for tax purposes in one of the following cases:
For more than 183 days in a calendar year:
· S/he is registered with the Record of the Italian Resident Population (so called “Anagrafe”).
· S/he has an habitual abode or residence in Italy.
· S/he has a domicile in Italy (for example, economic and social interests, family, or pricipal location of business).
US expatriates are advised to follow proper administrative procedures at the end of an international assignment to avoid overseas taxes.
What is the tax year in Italy?
Italy has a calendar tax year. This is similar to the US tax system.
What is an income tax rate in Italy?
Italy has a progressive scale of overseas tax for residents and non-residents range from 23 percent to 43 percent. Additionally, a regional tax of between 0.9 percent and 1.7 percent is assessed. Moreover, there is a municipal tax in a range from 0 to 0.9 percent depending on the municipality.
Which income is considered a taxable income in Italy?
The taxable income in Italy includes all compensation in-money or in-kind received during the calendar year that includes salary, foreign location allowances, company car and other types of income and allowances. The taxation of dividends depends on a type of participation: “qualified shareholding” and “no qualifed shareholding”.
Can American expats Italy file an expatriate tax return on overseas taxes with a spouse?
Spouses must file separate returns. A joint tax return is allowed in limited cases.
Is it a requirement to file a tax return in Italy and pay foreign income tax every year?
A tax return must be filed by September 30. However, any income tax is due by June 16.
Does Italy have a tax treaty or totalization agreement with the USA?
The USA and Italy signed an updated double tax treaty agreement in 1999. Italy signed a totalizaiton (social security agreement) with the USA in 1978. It means that Americans working in Italy are eligible to receive social security benefits for the working years in Italy. The USA is in the process of negotiating a FATCA agreement with Italy. The FATCA will become effective in 2014 so US expatriates are advised to understand the FATCA basics.
Although, this article provides a basic overview of expatriate tax requirements for expats Italy, each tax situation is unique. Consequently, proper guidance from an expatriate tax CPA is advised. International tax experts at Artio Partners will be pleased expats Italy with US expatriate tax preparation, FBARs, FATCA and other overseas tax issues.