Taxes for Expats – The US – Italy Tax Treaty
The US – Italy tax treaty was first signed in 1984, then replaced in 1999, although it was only fully ratified in 2009. It covers how dividends and certain other types of income are treated, and allows tax information sharing between the two countries.
The purpose of the treaty is to prevent double taxation for Americans living in Italy and Italian citizens living in the US, however it doesn’t prevent US citizens living in Italy from their obligation to file US taxes.
US taxes for expats in Italy
The US taxes based on citizenship, meaning that all US citizens and green card holders, including US expats living in Italy, with worldwide income of over $12,000 a year (in 2019), or just $400 of self-employment income, are required to file a US tax return each year.
Italy on the other hand only requires Americans to file Italian taxes in three circumstances: if they are registered as an Italian resident, if they have a residence in Italy, or if Italy is the center of their business, economic or social interests.
This leaves many US expats living in Italy having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to, giving them plenty of time to file their Italian taxes first (due by July 7th) .
US expats in Italy may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank, investment, and other financial accounts at any time during the year (and including any accounts that they have signatory authority or control over, even if not in their name).
The United States – Italy Tax Treaty
“Living in Italy offers expats a culturally rich life in a country that has a fascinating history.” – Expat info Desk
The United States – Italy Tax Treaty covers double taxation with regards to income tax, corporation tax, and capital gains tax, however, as already mentioned the benefits are limited for most American expats living in Italy. The treaty does ensure though 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 normally depends on where the income arises.
The way the treaty allows US expats to avoid double taxation on their income taxed in Italy is by allowing them to claim US tax credits when they file their US tax return to the same value as Italian income taxes that they’ve already paid.
For income arising in the US, Americans in Italy can claim Italian tax credits against income US taxes paid to the IRS.
To claim US tax credits against Italian taxes paid, expats must file Form 1116 when they file their federal tax return. By doing this, the vast majority of US expats in Italy won’t end up owing any US income tax.
Alternatively, expats can claim another exemption called the Foreign Earned Income Exclusion by filing Form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation.
Which exemption is most beneficial depends on each expat’s circumstances (e.g. their types of income, residency status, income levels, where their income originates, etc).
It is possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US – Italy Tax Treaty also allows the Italian government to send US expats’ Italian tax information directly to the IRS, as well as their Italian bank and investment account details and balances.
Some Americans in Italy, for example students and trainees, and professors and teachers, and some retired expats, may be able to claim a provision in the United States – Italy Tax Treaty (besides claiming US tax credits). Expats should consult a US expat tax specialise to check. Expats who can claim a provision in the treaty can do so by filing IRS Form 8833.
The US-Italy Totalization Agreement
A separate agreement called a Totalization Agreement helps US expats in Italy not to pay social security taxes to both the US and Italian governments. Expats’ contributions made while in Italy can be credited to either system. Which country they pay depends on how long they will be living in Italy.
Expats in Italy who are behind with their US tax filing because they were unaware that they had to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so before the IRS contacts them about it.