Taxes, everyone’s favorite subject. If you are an American living in Italy, you will have to file tax returns in both the US and Italy. The good news is that there is a Tax Treaty in place between the two countries so you won’t have to play double taxes.
If you have an Elective Residence visa, you are not allowed to work. So your income (assumption is that your nationality is US) will be entirely made up of things like Social Security, savings, private pensions, or other passive income received from sources outside Italy. (say you rent out property in the US for example)
So, what income is considered taxable by Italy? First resource is the US/Italy tax treaty. (Link at end). With regard to Pensions and the like, you go to Section 18, Paragraph 2.
” Payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in the other State”
Yes, this means that the intent is that Social Security is only taxed by Italy, not the US. However…….. I have also seen posts about Italian tax decisions where they have placed a narrow definition on “Social Security” to mean payments for disability, unemployment and the like. And that US Social Security is not taxable by Italy. Your not going to get a best of both worlds however. If your Italian tax people say SS should not be included in your Italian tax income, you best include it on your US return.
Yes, it is confusing. I’m reliably told that you can go to six different tax accountants in Italy and get six different answers. As you will need to engage the services of an accounting firm in Italy to file your Italian tax return, you will have to rely on their interpretation.
If you have a pension from employment by a government entity, that income is exempt in Italy as per Article 18, paragraph 3. (This is a rule of thumb, there are various types of government pension schemes, you will need to once again get expert advise.)
If you have large savings and get lots of interest, you will need to read Article 11.
At the end of the day, you will file and pay taxes to both the US and Italy. You won’t pay double because you will get credit against Italian taxes for amounts paid to the US. This area is likely to be the biggest challenge to expats. Whatever you have to pay to get competent service in this area will be money well spent.