US Expat Taxes for Americans Living in Italy – What You Need to Know
There are an estimated 169,000 Americans living in Italy.
Living in Italy is an incredible experience for a multitude of reasons: the history, the culture, the cuisine, the wine, the architecture, and the countryside to name but a few. As an American expatriate living in Italy though, what exactly do you need to know regarding filing US expat (and Italian) taxes?
All US citizens and green card holders who earn a minimum of $10,000 (or just $400 for self-employed individuals) anywhere in the world are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you already pay income tax in Italy, there are various exclusions and exemptions available to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If you earn more than US$10,000 (or $400 for self-employed individuals), you should file form 1040. While taxes owed are still due by April 15th, expats get an automatic filing extension until June 15th. This can be extended still further online until October 15th.
If you have foreign assets worth more than US$200,000 (per person), excluding a home owned in your own name, you should also file a form 8938 declaring them.
If you had more than US$10,000 in total in one or more foreign bank accounts at any time during the tax year, you should also file FinCEN form 114, otherwise known as an FBAR (Foreign Bank Account Report).
“Italy’s tax authorities have targeted Italian companies and multinationals operating locally for evading taxes, especially those using holding companies based in other countries, such as Luxembourg and Ireland, as they seek to repair public finances hit by a weak economy.”
– (The Wall Street Journal).
If you are paying income tax in Italy, there are several ways to avoid paying tax on the same income to the IRS as well. The two primary ways are by claiming the Foreign Earned Income Exclusion, which lets you exclude the first around US$100,000 of foreign earned income from US income tax if you can demonstrate that you are resident in Italy, or the Foreign Tax Credit, which allows you a dollar credit for every dollar of tax that you’ve already paid in Italy. The Foreign Tax Credit is typically a better option for expats who more tax in Italy than they would owe in the US, as they can carry the excess tax credits forward for future use. Don’t forget though, even if you don’t owe any tax in the US, if your income is above US$10,000 (or $400 for self-employed individuals) you must still file.
The US and Italian governments share taxpayer info, while Italian banks pass on their US account holders’ account info to the IRS, so it’s not worth being economical with the truth or burying your head in the sand. The penalties for tax evasion for expats are tough to say the least.
If you’re a US citizen, green card holder, or dual citizen and you have lived in Italy for some time but haven’t been filing US taxes, don’t fear: there’s a program called the IRS Streamlined Procedure that allows you to catch up on your filing without facing any penalties. It’s better to do this soon though, before the IRS comes to you.
Italian taxes – what you need to know
Americans must file an Italian income tax return if they are registered as a resident, or if they have a residence in Italy, or if Italy is the principle center of their business, economic, or social interests. Expats who work in Italy will have their income tax deducted at source, and if this is their only income, they don’t in fact need to file an Italian tax return. Expats who do need to file should file by July 23rd, with any tax due payable by June 30th. If they have any assets outside Italy, they must also file a monitoring return, though these assets aren’t currently taxed. Italian penalties are harsh for late filing and payment. The Italian equivalent of the IRS is called the Agenzia delle Entrate.
Income tax rates currently range from 23% to 43%.
There are also regional and municipal income taxes.
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.
We strongly recommend that if you have any doubts or questions about your tax filing situation as a US expat living in Italy, that you contact an expat tax specialist.