Living abroad has gained popularity for many U.S. citizens as they plan for how to spend their retirement years. Italy, an already popular retirement destination for many Americans, recently introduced a new tax incentive that may help further attract foreign retirees. Italy is home to some of the most historic architecture, beautiful cities, and amazing food and culture. Living in Italy may be a dream for some individuals and a newly introduced 7% flat tax could help make this dream a more practical reality.
However, U.S. citizens must take care as they remain taxable in the United States even if living abroad. Navigating the U.S. and Italian tax and financial system is a complex undertaking. It requires an understanding not only of each jurisdiction’s tax legislation, but most importantly how laws interact with one another. In this article, several of the key benefits around the 7% flat tax incentive are outlined and how they pertain to U.S. citizens seeking “la bella vita” through a retirement in Italy.
How Can a U.S. Expat Retiree Qualify for Special Italian Tax Treatment?
Individuals who qualify under the Article 1 (273-274) of Law N.145/2018 (so-called Legge di Bilancio 2019) may reap the benefits of this tax regime for 10 years. The exemption begins in the year in which the tax residence is transferred to Italy and the following nine years there-after. In order to qualify for the tax incentive, an individual must be a non-resident of Italy (regardless of nationality) who receives a non-Italian pension (public or private sector) and meets the following basic criteria:
- Has not been a tax resident of Italy for the last 5 years.
- Transfer their tax residence to the South of Italy in a qualifying municipality with a population of 20,000 or fewer residents. The qualifying regions are Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise, and Puglia. Bear in mind to qualify as a tax resident you must spend at least 183 days within the county.
- Previously been a resident of a country that has a tax treaty arrangement in place with Italy.
Individuals who meet these requirements may qualify for the special 7% Italian flat tax regime. Remember that this special tax rule does not apply to all of Italy and only the specific regions mentioned above. A move to other parts of Italy will require more sophisticated tax planning.
What are the benefits of making this 7% flat tax Italian election?
The income tax rates in Italy tend to be on the higher end. For example, any income earned above 75,000 EUR is subject to a standard Italian income tax rate of 43%. Under the new preferential tax regime an individual would be exempt from income taxes at the normal scale on all foreign income and only pay 7%. This includes pension income, capital gains and dividends, overseas business income, rental income, and social security. This is an enormous benefit for U.S. citizens who may actually face higher taxation in Italy under normal rates.
In addition, individuals qualifying under the special tax regime would be exempt from declaring foreign assets as well as being subject to any wealth taxes on foreign assets. It is important to note that this regime does not extend to any Italian sourced income. Any Italian sourced income (such as wages from working in Italy) will be subject to the normal marginal rates. This is likely not an important factor for many U.S. expat retirees who do not plan to work while they reside in Italy but should be considered.
What are the Implications for U.S. Citizens Moving to Italy?
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.
Conclusion: Cross-border Financial Planning for Americans Moving to Italy
Retiring and living abroad can be complex as there are many financial issues to consider with regards to personal finances, taxes, and estate planning. Fortunately, American expat financial planning and expat investing issues can be successfully managed with a knowledgeable American expat financial advisor. With proactive planning and working with experienced U.S. expat financial advisors, retirees can fulfill their retirement dreams, and spend a desired amount of time abroad in Italy.
Round Table Wealth Management offers the expertise to allow individuals to enjoy a prosperous retirement abroad while satisfying all of their financial goals. Many financial advisors may only be familiar with one jurisdiction and overlook issues that will create complexity in the other. This is why it is vital to work with an American expat fiduciary financial advisor familiar with Italian clients. With careful planning and the right advice, American expats can invest their savings efficiently and build long-term wealth while enjoying all Italy has to offer.