Expat Taxes – A Guide for Americans Living in Italy

Whether you’re dreaming of retiring in Tuscany or setting up your remote office with views to the Colosseum in Rome, one thing remains true – as an American expat, you will still need to file US taxes. Yep, even if you move abroad! And, if you become an Italian resident, you will likely owe taxes there too. Does it mean you will have to pay taxes twice on the same amount of income? In this article, we will walk you through the essentials every US expat in Italy should know, including how to avoid double taxation and practical tips to optimize your taxes. Because living your best life in Italy should come with good wine, great views, and zero tax stress. 

The good news? You can avoid double taxation by taking advantage of IRS provisions such as the Foreign Earned Income Exclusion (FEIE), the Foreign Tax Credit (FTC), and the benefits provided in the Italian-US tax treaty and the totalization agreement.

How to avoid US-Italy double taxation

Claiming the Foreign Earned Income Exclusion is one of the easiest ways to reduce your US tax bill. For the 2024 tax year, if you qualify, you can exclude up to $126,500 in foreign-earned income from US taxes. Married couples filing jointly can exclude up to $253,000 if both spouses qualify. To claim the FEIE, you must meet one of two tests: the physical presence test or the bona fide residence test.

The physical presence test is based on time spent abroad. You qualify if you’re outside the US for at least 330 full days in a 12-month period. Make sure you track your travel days like your residency depends on it, because it does.

The bona fide residence test is about proving that Italy is your main home. This test gives you more flexibility to travel to the US every now and then, but you need to show that Italy is your true place of residence. It’s also worth mentioning that it is harder to prove if the IRS audits you.

Another IRS provision for expats is the Foreign Tax Credit. The FTC lets you claim a dollar-for-dollar credit in the US for the income taxes paid to Italy.  Since Italy’s tax rates are generally higher than US rates, the FTC can often reduce or eliminate your US tax liability.

By claiming the FEIE or the FTC in the US, you will be able to reduce your US tax bill, often to zero. This helps you avoid paying taxes twice (paying once is enough… grazie)

Is the FEIE or Foreign Tax Credit better for US expats in Italy?

The Foreign Tax Credit (FTC) offers several key advantages over the Foreign Earned Income Exclusion (FEIE). There’s no cap on the tax credits you can claim, and it applies to all types of income, not just earned income like salaries. Using the FTC also allows you to contribute to US retirement plans such as traditional and Roth IRAs and claim refundable US credits like the Child Tax Credit. These benefits often make the FTC a better choice for US expats in Italy.

So which option is better for US expats in Italy, the FEIE or the FTC? The short answer is… it depends. You will need to consider several factors such as your income level, the taxes you’re paying in Italy and your overall financial situation. Make sure you work with an expat tax professional who understands the unique challenges US expats face in Italy. 

Can You deduct or exclude housing costs in Italy?

Yes, you can! And if you’re living in a pricey city such as Milan, that’s probably music to your ears. If your income exceeds the Foreign Earned Income Exclusion limit, you can lower your US taxes further by claiming the Foreign Housing Exclusion or Deduction. This allows you to exclude or deduct qualifying housing expenses like rent, utilities, and furnishings while living in Italy.

The standard limit for housing costs is 30% of the FEIE threshold, which equals $37,950 for 2024. However, this amount can vary depending on where you live in Italy and the number of qualifying days you spent abroad during the year.

To claim the Foreign Housing Exclusion (or Deduction if you’re self-employed), you’ll need to file IRS Form 2555.

Do Americans living in Italy need to file an Italian tax return?

In most cases, US expats living in Italy usually have to file taxes there too. Whether you need to file depends on your residency status in Italy and your income level. The Italian tax authority, officially called the Agenzia delle Entrate, considers you a tax resident if you spend 183 days or more in the country during the year. You could also be considered a tax resident if Italy is your main home or if you have strong ties, such as owning property, having family or running a business in the country.

If you qualify as a tax resident in Italy, you’ll be taxed on your worldwide income, just like in the US. If you’re a non-resident, you’ll only pay tax on income earned in Italy. Either way, it is important to know where you stand so you can file the right returns and avoid any unpleasant surprises from the Italian taxman. 

How much taxes are we talking about, though? Italy income tax rates range from 23% to 43%, plus regional and municipal taxes. On the brighter side of things…Italy also offers a special tax regime known as ‘’Regime Impatriati’’ (Inbound Workers Regime). If you meet the criteria, you get to cut your taxable income in half for five years. There’s more info on this great tax break below

To understand your obligations and stay compliant, make sure you seek advice from a reputable Italian tax professional. 

Filing taxes in Italy and the US – where should expats file first?

If you’re a US expat living in Italy, you’ll usually want to file your Italian tax return first. This is because once you’ve paid your Italian taxes, you can then claim the Foreign Tax Credit on your US return.

In Italy, the tax year runs from January 1 to December 31, just like in the US. This makes it easier to claim foreign tax credits. Italian tax returns are usually due by June 30 of the following year. 

As an expat, your US tax deadline gets automatically extended to June 15, without needing to file any extension. Be aware, however, that an extension to file is not an extension to pay. If you expect to owe taxes in the US, you still need to make a payment by April 15 to avoid late payment interest and penalties. If your Italian tax return isn’t finalized before the US deadline, you can request an extension and push your deadline to October 15.

Special tax breaks for foreigners moving to Italy

Italy’s impatriate tax regime offers major tax benefits to expats who relocate for work. Under the rules, eligible workers get a 50% tax cut on their taxable income, meaning only half their earnings are subject to Italy’s income tax (IRPEF). If you have a dependent child under 18 or have a child after moving you can claim an extra 10% cut, reducing your taxable income to just 40%.

To qualify, you must:

• Have lived outside Italy as a tax resident for at least three years before moving.
• Commit to being an Italian tax resident for at least four years.
• Have a higher education degree or a recognized professional qualification.

Eligible jobs include:

• Scientific research and innovation
• Management
• University professors and lecturers
• Professionals in specialized fields

This tax break applies to employment, self-employment, and business income, but only for income earned mostly in Italy. Note also that earnings above €600,000 per year don’t qualify.

The benefit lasts for five years but can be extended to eight years if you bought a home in Italy before December 31, 2023.

With Italy’s progressive tax rates reaching up to 43%, this regime offers significant savings, especially for high earners.

US – Italy tax treaty and totalization agreement

The US-Italy tax treaty aims to prevent double taxation and clarify how income is taxed across both countries. It covers items such as pensions, dividends, and corporate income. However, it’s important to note that the treaty doesn’t exempt Americans in Italy from filing US taxes. If you are a US citizen or green card holder, the IRS still expects your annual return.

It is also worth noting that unlike other tax treaties,, the US-Italy tax treaty doesn’t recognize the tax benefits of Roth IRAs. If you take a distribution from a Roth IRA while in Italy, Italy may still treat them as taxable income. In contrast, traditional IRA withdrawals are generally taxed at standard Italian income taxes. 

Certain pensions may receive favorable treatment, but whether you qualify depends on factors like your residency status and the type of pension. This is where a US tax expat professional is crucial to help you save money and plan for retirement.

When it comes to Social Security, the US-Italy Totalization Agreement offers huge benefits. It ensures you don’t contribute to both systems at the same time, and it allows your contributions in one country to count toward eligibility benefits in the other.

Foreign bank accounts and assets reporting – FBAR and Form 8938

If you’re an American living in Italy, you’ll need to report your foreign-registered financial accounts if their total (combined) balances exceed $10,000 at any time during the year. Qualifying accounts include bank accounts, joint accounts, investment accounts, pension accounts, and business accounts for which you have signatory authority. To report these, you’ll need to file FinCEN Form 114, also known as a Foreign Bank Account Report (FBAR) directly with the US Treasury.

You might also need to file Form 8938 (Statement of Specified Foreign Financial Assets) as part of your US tax return. This applies if your foreign assets are worth more than $200,000 at the end of the year or $300,000 at any time during the year if you’re filing as a single person. For married couples filing jointly, the limits are doubled. 

You don’t have to report real estate held in your own name, but if you own a property through a foreign entity (for instance, a corporation or a trust), then yes, it counts and you’ll likely need to report it.

Other US reporting requirements for Americans living in Italy

If you’re an American living in Italy, you might need to report any non-US-registered corporations (for instance, an Italian SRL) you own or control more than 10% of. Depending on the structure, you may need to file forms like the 5471, 8865 or 8858, each with its own thresholds, complexities and potential penalties for missing the deadline. 

Certain Italian investments, like mutual funds or other financial products may also trigger additional reporting requirements, and potentially additional US tax liabilities under the PFIC (Passive Foreign Investment Company) rules. These are especially complex and come with punitive tax treatment if not handled correctly.

US tax filing for expats is complicated, so it’s important to work with a US expat tax professional who is familiar working with Americans in Italy.

Keep in mind that Italian banks and financial institutions share information about US citizens with the US government. The Italian tax authority also exchanges tax data with the US under international agreements and US laws. In short, Uncle Sams knows you’re abroad, and he expects your paperwork to be in order.

Filing US expat taxes while living in Italy

As an American living in Italy, you’re subject to both US and Italian tax rules. By claiming provisions such as the Foreign Earned Income Exclusion, the Foreign Tax Credit, and the US-Italy tax treaty, most expats don’t end up paying tax twice however, and some even receive unexpected refunds.

If you missed filing your US taxes because you didn’t know you had to, you can catch up penalty-free using the IRS Streamlined Offshore Filing Procedures.

Before you jump on that train to Florence to chase their stunning sunsets, make sure your taxes aren’t chasing you! Book a tax consult with one of our tax experts here (let’s introduce the link please). 

Get in touch if you need assistance with your US taxes as an expat, and also remember to seek advice on Italian taxes from a reputable Italian tax professional.