Who is this for?
Primarily this page and guides are for retired Americans who have arrived in Italy on Elective Residence Visa’s. Much of the information regarding who has to pay and the tax rates are applicable to most people however. As Americans, you are in the rather unique situation of having to pay taxes to both Italy and the Unites States.
Working In Italy
Anyone who has earned income (income from working) will be taxed on the income they earn while working in Italy. This applies from day one, Euro one. Working in Italy also includes remote work. To be clear, even if you are working for a non Italian company and getting the money deposited into a non Italian bank account, you are considered working in italy if you are physically in Italy while doing the work. This applies from day one, no matter what type of visa you are on. [Lets be reasonable though. No one is going to chase you down if you deal with work emails and tidy up some loose ends while in Italy on vacation.] There is such a thing as a Digital Nomad Visa, but Italy is not yet part of the handful of EU countries that offer this.
The key figure to remember is: 183 days in a Calendar Year. Anyone who spends more than 183 days in Italy must pay tax on their Worldwide Income. Because things vary from region to region, I know there are some (mostly pre-Brexit Brits) who have resident cards, but spend less than 183 days in Italy. I only mention this because a resident card is not a trigger for tax liability. It is triggered by physical presence. (There are a couple other triggers, but they have to do with more obscure events like center of economic interest and other things that would apply only to people with much more complicated situations.)
A Tax Summary for Expats
Types of Income
When you are a Tax Resident (in Italy more than 183 days) you will pay tax to Italy on your worldwide income. Because this guide is targeted to expats who are retired and here on an Elective Residence visa, we will be discussing only Passive Income. (Income not coming from doing work.)
- Pension Income: The primary source will your Social Security. This IS taxable by Italy. [If you are a dual citizen it is ONLY taxed by Italy].
- Social Security: This IS taxable by Italy as normal income. [If you are a dual citizen it is ONLY taxed by Italy].
- Government Pensions: Government sourced pensions [Federal or State. Examples would be Military, Teacher, Other Federal or State Employee.] are NOT taxed by Italy. They will not be listed on your Italian tax return
- Other Pensions: Taxed by Italy as normal income
- Interest: Taxed by Italy at a rate of 26%
- Dividends: If you have substantial dividend income [More than 2% of the voting rights or 5% of the capital in an Italian owned company OR 20% of the voting rights or 25% of the capital of a non-Italian company you will want professional assistance) Otherwise, the Italy will tax Dividend income at 26%.
- Rental income: This is for people who keep and rent out their homes back in the U.S. for income. Useful guide here
In particular, if the income deriving from the rented real estate owned outside of Italy is subject to foreign rental income taxes in the foreign country, the same taxable base utilized in the foreign tax return is subject to taxation also in Italy. This income is then included in the Italian ordinary taxable base and taxed at progressive tax rates.
In this case, the taxpayer is entitled to claim for the foreign tax credit in the Italian tax return in order to avoid double taxation (if any). The said deduction is limited to the proportion of the Italian tax corresponding to the ratio between the taxable income produced abroad (and subject to double taxation) and total income. The foreign tax credit cannot, in any case, exceed the net Italian tax due on the foreign source income.
- IRA and 401k: Withdrawals from these accounts are treated as normal income by Italy. If you have withholding taken by the U.S. on the withdrawal you can claim that as a credit against Italian taxes
- Roth IRA: Italy does not recognize the tax free nature of a Roth IRA. You should therefore be expected to pay tax on the growth/earnings of the account. Very good record keeping will be the key here. You will be paying tax on the growth even if you do not take distributions. Basically you are paying the tax when earned and none when you take withdrawals. Here is a link to a very good source on the subject.
- Capital gains made as of January 2019 will be taxed applying a flat tax rate of 26% on the whole capital gains amount. The 2018 Italian Financial Bill introduced a final WHT at 26% both to tax resident and non-tax resident individuals for capital gains deriving from a qualified and a non-qualified shareholding (starting from 1 January 2019). Applies to both Qualified and Non-Qualified shares. Don’t worry if you don’t know what this is. The rate is the same and you likely have Qualified Shares.
- Post tax accounts: Such as Savings or Money market. Not taxed by Italy. HOWEVER see the section on Wealth Tax!!
Tax residents in Italy will pay a tax on their Foreign Assets. This is for Real Property and for Financial Products.
Italy Wealth Tax — Link to PDF File on Italian Wealth Tax
For Real Property the amount is .76% of the price you purchased the property for, or the market value. (Example if you have a house worth $250,000, the amount would be $1,900)
For Financial Products the amount if .2% of the following types of assets.
- Equity investments in foreign companies (but only publicly traded shares, not shares in private companies);
- Investments in government and corporate bonds;
- Unit trusts, funds and certain types of with-profit insurance contracts;
- Foreign currency contracts;
- Precious metals;
- Derivative contracts.
Common banking accounts are taxed at a flat amount of 34.20Euro
Occupational Pension Accounts are exempt. (This would seem to include IRA’s)
Seven Percent Tax Program
What does the special tax relief consist of?
A 7% flat tax on all income for all pensioners (regardless of nationality) who:
- Have been tax resident outside Italy for at least five (5) years prior to the year in which they become Italian tax resident;
- Transfer their tax-residence to the South of Italy, to a municipality (comune) with a population of fewer than 20,000 inhabitants
- Have previously been resident with which Italy has in place arrangements for administrative co-operation (which includes any EU member state and a large number of other countries).
The regions are: Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, Puglia
Additionally people who use this program are exempt from the wealth taxes. The program will last for ten years. CLICK FOR PDF