It is critical to remember that a U.S. citizen or permanent resident (green card holder) will always remain taxable by the United States. This is true even if you are living and paying taxes in Italy. The United States imposes taxes based on citizenship, not residency. The passage of the Foreign Account Tax Compliance Act (FATCA) and the surrounding media attention has been instrumental in making more U.S. citizens living overseas aware of their tax obligations.
Fortunately, migrating from a treaty country with Italy like the United States, U.S. residents would be entitled to a foreign tax credit on their US income tax return for the 7% tax paid to Italy. So, in effect, there is no incremental tax cost, only a sharing of the U.S. tax liability between the United States and Italy. In contrast, living in other regions of Italy would subject an individual to a higher net Italian tax on income and capital gains. Beyond U.S./Italian income taxation issues, there are significant cross-border financial planning issues to consider as a U.S. expat in Italy:
- How will Italy tax my IRA, Roth IRA, and 401k accounts?
- What brokerage firm will work with American expats in Italy?
- How do I invest to mitigate exchange rate risk between the U.S. dollar and Euro?
- Can I receive U.S. Social Security living in Italy?
- Does Italy have estate and inheritance taxes?
- Will my U.S. estate plan still pass assets to intended beneficiaries?
- Are there other financial, legal, and tax issues to be considered when moving to Italy?
As one can see, there are many unique and distinct issues. Planning before moving to Italy often leads to the optimal financial outcome. In some instances, such as receiving a U.S. inheritance while Italian domiciled, the results may be extreme and unexpected. It is vital that U.S. citizens retiring in Italy are prepared and understand the implications that living in another country brings.