I get asked a lot about filing Italian and American taxes, so let's dive deep into this, shall we?
As an American expat living in Italy, you are required to comply with tax laws in both countries, and understanding how to do so efficiently can save you from headaches and potential penalties.
Let me caveat this article by reiterating the fact that I am not a tax professional. I will share what I know, but for your specific tax situation, reach out to a commercialista. Contact me and I can refer you to one.
Understanding Your Tax Residency in Italy
As an expat, your tax obligations in Italy depend on whether you are considered a tax resident. You are deemed a tax resident in Italy if:
You are registered as a resident in the Anagrafe (the local registry office) for more than 183 days in a calendar year.
Your primary center of personal and economic interests is in Italy.
Italian tax residents are taxed on their worldwide income, while non-residents are only taxed on income earned within Italy. When I say worldwide income, I'm referring to any and all money you make, even if your clients are in the U.S. or elsewhere outside of Italy.
To be clear, if you move to Italy and register the way you're supposed to, you will be considered a tax resident.
Italian Tax Obligations
As you've probably heard, Italy has high taxes. Italy’s income tax system is progressive, meaning the tax rate increases with income. Rates range from 23% to 43%, depending on your earnings. In addition to IRPEF, regional and municipal taxes may also apply, typically ranging from 1% to 3%.
However, certain regions offer tax incentives to foreigners: you may qualify for tax on only 7% of your income for several years, so take advantage of that if you can.
Filing Your Tax Return in Italy
Most individuals file their Italian tax return (Dichiarazione dei Redditi) using the Modello 730 or Modello Redditi. These forms cover employment income, investment income, rental income, and other sources. The filing deadline typically falls in late June or July.
Given that the form is in Italian and it looks even more complicated than the IRS's forms, I highly recommend you find a commercialista to help you. More on that in a minute.
Social Security Contributions
If you are employed or self-employed in Italy, you must pay into the Italian Social Security system (INPS). Contributions vary depending on your profession and income.
However, you also have the option to pay American Social Security instead. You have to choose between the two. For me, it wasn't worth starting to pay into the Italian system, because you have to reach a certain threshold before you can qualify to withdraw the funds upon retirement, and I wasn't going to hit that number.
If you opt for American Social Security, you need to request a Certificate of Coverage from the Social Security Administration. This is a document that tells the Italian government that you're already paying SS in the U.S. and don't need to pay in Italy.
U.S. Tax Obligations for Expats
The U.S. is one of the few countries that taxes its citizens and green card holders on their worldwide income, regardless of where they live. This means you must file a U.S. federal tax return even if you live in Italy full-time.
Key U.S. Tax Forms for Expats
Form 1040: The standard U.S. individual income tax return.
Form 2555: To claim the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to $120,000 (for 2023) of foreign-earned income.
Form 1116: To claim the Foreign Tax Credit (FTC), which offsets taxes paid to the Italian government.
FBAR (FinCEN Form 114): Required if you have foreign bank accounts with an aggregate value exceeding $10,000 at any time during the year.
FATCA (Form 8938): Required if your foreign financial assets exceed certain thresholds (e.g., $200,000 for single filers living abroad).
Filing Deadlines
The standard U.S. tax filing deadline is April 15, but expats receive an automatic extension to June 15. You can request an additional extension to October 15 if needed.
Here's a tip: you can use a service that specializes in filing taxes for expats if your situation is complicated, but if it's not, you can use TurboTax. Just make sure you tell the software that you live out of the U.S. and make sure you check the box to apply the Foreign Earned Income Exclusion.
Avoiding Double Taxation
One of the primary concerns for expats is the risk of being taxed twice on the same income. Fortunately, the U.S.-Italy Tax Treaty and mechanisms like the Foreign Tax Credit (FTC) and Foreign Earned Income Exclusion (FEIE) help mitigate this risk.
Foreign Tax Credit (FTC)
The FTC allows you to claim a dollar-for-dollar credit for taxes paid to the Italian government on income that is also taxed by the U.S.
So if you pay €3,000 in taxes in Italy, you can claim that on your American taxes, and your tax bill will be reduced by that amount.
Here's something tricky I hadn't figured out last year: in Italy, taxes aren't filed until the second half of the year, but for American expats, the deadline is in June. So you don't actually know how much you're paying in Italian taxes by the time you pay in the U.S.
To remedy that, this year I'm going to ask my commercialista to process my return early so I know what I'll be paying. That way, when I file my American taxes, I can include what I'm paying in Italy. Make sense?
Foreign Earned Income Exclusion (FEIE)
The FEIE lets you exclude a certain amount of your foreign-earned income from U.S. taxation if you meet the Physical Presence Test (330 days in a foreign country) or the Bona Fide Residence Test.
The Importance of a Good Commercialista
Okay, let's talk about getting help because I do NOT recommend trying to file your Italian taxes on your own.
It took me a long time to find a commercialista who got my specific situation, that of being an American expat who only has clients in America. I interviewed five, and every single one of them acted like he knew how to handle my situation...but he didn't.
So make sure you're completely confident in a commercialista's abilities. Or better yet, use mine!
While managing taxes as an American expat living in Italy can be daunting, understanding the requirements and planning ahead can simplify the process. Just like in the U.S., keep track of business expenses and invoices. You will need to also create invoices in Italy so that the Italian IRS has a record of them.
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