LisaC1
3/22/2017 13:11 EST
Here are some questions and answers from the American tax attorney in Rome that I have corresponding with. I thought this might be of use to others.
1. Will we be liable for income taxes for 2017 in Italy from September 2017 through December 2017? If so, when do taxes need to be paid by and the return sent?
"You will be subject to Italian taxation on your Italian-sourced income, regardless of when it was earned. The first tax payment is due by June 30th of the following year and the return by September 30th. "
Thanks so much for getting back to me. I would just like to clarify, if we do not work in Italy during 2017 and maintain all of our investments in the US, we will not be subject to Italian income tax and thus will not need to file Italian taxes for 2017. Is this correct? We would have no Italian sourced income. We will just have a small bank account in Italy.
"It is correct that you would have no Italian filing obligation for 2017 if you are not resident. As U.S. citizens, you would always have to file a resident return."
We will become residents in Italy shortly after we arrive in September 2017. We will be registering in the comune right away so we can get health insurance and buy a car. I know we will always have to file a US tax return but am now confused on whether or not we will need to file Italian tax return for 2017, assuming we have no Italian sourced income? Sorry to have so many questions. I just want to understand our situation as clearly as possible and make no mistakes.
"Italian law does not allow for tax residency for part of the year so in 2017 you will be non-resident for the entire year. Therefore, if you have no Italian-sourced income in 2017, you won’t owe any Italian taxes nor will you have to file a return."
2. Is the wealth tax on our existing IRA’s? Someone from a forum I am on said that he has been told by several commercialistas that they are not subject to the wealth tax.
"No, there is no wealth tax due on the IRAs."
3. Are assets in a revocable trust subject to the wealth tax?
"This would require a specific research."
4. As dual citizens, whom do we pay for our dividend/interest and eventual IRA income? Italy first and then get credited on our US tax return or the other way round?
"Likely both countries with a foreign tax credit."
5. Are social security payments taxed in Italy only, versus the US, once we draw them?
"Under the terms of the treaty, social security is taxed only in Italy."
6. If our house hasn’t sold before we move over, can we claim the property taxes against any type of Italian ones? They are about $8400 per year.
"You can claim real estate taxes against the wealth tax."
6. After 2017, even if we still own our house, do we change residency status with the State of VT in order not to pay any further taxes there?
"This would require research. I am not familiar with VT law so it might be better for you to contact someone locally."
7. We would also like to maintain our driver’s licenses in the US as well as our US accounts. We are thinking of using our daughter’s address. She currently lives in MA. Would having a driver’s license subject us to that State’s income taxes?
"This would require research. I am not familiar with MA law so it might be better for you to contact someone locally."
8. Our US will is currently for the State of VT. As the bulk of our money will reside in the US, I would assume that we would just have our will in the States. I don’t know, though, how this works once you don’t have a US address, unless we use our daughter’s, if that is possible? I spoke with a notaio in Boston, who recommended not having an Italian will. She thought it would just complicate things and that we would have our house in our US will. She said that the Italian law would follow inheritance protocol.
"You would need to speak with an estate lawyer with international experience. I know someone in Rome who does this if you would like a referral."
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proseh58
3/31/2017 07:14 EST
O.K., fellow American expats living in Italy, I need help. I've been reading this site with interest concerning taxes and thought I understood how it works, but my first visit to a commericialista yesterday seems to refute that.
We've lived in Puglia since Jan of last year and assume we need to file Italian taxes for 2016 as well as U.S. From what I've read on the forum, Italy taxes SS and pensions, but we can deduct what we pay here from our U.S. tax bill. Our commercialista, whom I'm not sure has ever done this before (Monopoli is a small, parochial city), suggested that Italy does not tax SS because it is public, but does tax private pensions, U.S. property and investments. He also reversed the equation, saying Italy would deduct whatever we paid in the U.S. from our Italian bill.
Who knows what is true? Also, at what rate does Italy tax pensions, investments and property? And since Italian taxes are not filed until June 30th, does that mean we have to file an extension on our American taxes (the electronic program isn't available yet, according to the accountant) or that we can't get our credit until next year, if indeed the deduction goes against U.S. taxes rather than Italian?
Please help me, all you knowledgeable expats!
Pamela
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proseh58
3/31/2017 07:14 EST
O.K., fellow American expats living in Italy, I need help. I've been reading this site with interest concerning taxes and thought I understood how it works, but my first visit to a commericialista yesterday seems to refute that.
We've lived in Puglia since Jan of last year and assume we need to file Italian taxes for 2016 as well as U.S. From what I've read on the forum, Italy taxes SS and pensions, but we can deduct what we pay here from our U.S. tax bill. Our commercialista, whom I'm not sure has ever done this before (Monopoli is a small, parochial city), suggested that Italy does not tax SS because it is public, but does tax private pensions, U.S. property and investments. He also reversed the equation, saying Italy would deduct whatever we paid in the U.S. from our Italian bill.
Who knows what is true? Also, at what rate does Italy tax pensions, investments and property? And since Italian taxes are not filed until June 30th, does that mean we have to file an extension on our American taxes (the electronic program isn't available yet, according to the accountant) or that we can't get our credit until next year, if indeed the deduction goes against U.S. taxes rather than Italian?
Please help me, all you knowledgeable expats!
Pamela
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rsetzer99
3/31/2017 14:39 EST
It does not appear to be uncommon to find tax preparers here in Italy who will take the position that US Social Security is not taxed by Italy. I have even seen opinions that argue this be because the feel Social Security because of the way it is named is more similar to social welfare payments than pension payments.
But, that is really just food for thought as the consensus does seem to be that Social Security is taxed by Italy. Also, a first read of the Tax Treaty, suggests that only Italy taxes it, but the Savings Clause then tosses everything on its head.
I believe your tax preparer is correct in that the US gets first crack and then Italy is next is line.
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JacksterJam
3/31/2017 14:51 EST
Prose, electronic filing of U.S. taxes is available; I e-filed mine in February using free software available on the IRS website. I file my U.S. taxes first, then my commercialista credits my Italian tax bill by the amount I paid in taxes to the U.S.
U.S. social security payments are indeed taxable by Italy. Article 18, Section 2 of the tax treaty covers that. From the technical explanation of the tax treaty:
"The treatment of social security benefits is dealt with in paragraph 2. As in the prior Convention . . . this paragraph provides that payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the other Contracting State will be taxable only in the other Contracting State. This paragraph applies to social security beneficiaries whether they have contributed to the system as private sector or Government employees."
However, the savings clause of the tax treaty also gives the U.S. the right to tax U.S. social security benefits if it is subject to U.S. tax. That is, many social security recipients do not pay taxes on their benefit, however Italy will tax it. If recipients have other types of income, then it is common for those folks to pay taxes to the U.S. on at least a portion of their Social Security benefits, if not all. It depends on one's complete income scenario.
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Christianedh
4/3/2017 12:43 EST
I receive SSA benefits and I'm taxed in Italy. Do not forget that you don't pay taxes on the first €8000 and you can tax deduct many items such as medical care. If you bought a house, many home improvements are 50% tax deductible over 10 years.
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LisaC1
4/3/2017 17:24 EST
Proseh58 and Rsetzer99
Please see my post at the top of this discussion. The American tax accountant in Italy who prepares both US and Italian tax returns stated this:
5. Are social security payments taxed in Italy only, versus the US, once we draw them?
"Under the terms of the treaty, social security is taxed only in Italy."
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LisaC1
4/3/2017 17:29 EST
Proseh58,
Here is additional information that was provided by the accountant I have been corresponding with that I mentioned:
The ordinary tax rates that would be applicable to, for example, pension and social security income, are as follows:
from up to rate
0,00 15.000,00 23,0%
15.000,00 28.000,00 27,0%
28.000,00 55.000,00 38,0%
55.000,00 75.000,00 41,0%
75.000,00 over 43,0%
There are additional regional and municipal taxes that are due on top of the above.
As a general matter, a flat tax rate of 26% is payable on investment income but it would be necessary to look at the sources of income to determine whether that would be the case for your income. Also consider that there is a wealth tax due by tax residents on foreign financial accounts and foreign real estate.
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JacksterJam
4/3/2017 17:51 EST
Lisa, there is a "savings clause" in the tax treaty that allows the U.S. to tax social security benefits of their citizens living abroad the same if that citizen's benefits are subject to taxation when living in the U.S.
Article 1, Section 2 (savings clause) of the tax treaty basically means that it 1) guarantees the right of the United States to impose taxation on its citizens who are residing in other nations, and 2) guarantees the right of the United States to impose taxation on its citizens as though the tax treaty didn’t exist.
Note that “U.S. citizens” may, and in many cases are, also citizens of their country of residence.
The tax treaty is tricky and must be read pretty much in it's entirety to ensure a full understanding of how one article affects another. If the U.S. taxes one's social security benefits, the best one can do is get a credit for that toward the taxes one pays Italy on that same income.
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JacksterJam
4/3/2017 18:15 EST
Lisa, I would be interested to know how your accountant perceives Article 1, Section 2. Please share if you discuss with him/her. I have also read the Technical Explanation of the tax treaty and it says, in part, "Paragraph 2 of Article 1 of the Convention contains the traditional saving clause found in
U.S. tax treaties. The Contracting States reserve their rights, except as provided in paragraph 3, to tax their residents and citizens as provided in their internal laws, notwithstanding any provisions of the Convention to the contrary." I didn't read anything in paragraph 3 that would protect one from paying the U.S. taxes on their social security benefits, if required by the IRS, but I am not a tax professional.
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LisaC1
4/3/2017 18:16 EST
Jackster,
I wonder why, then, the accountant expressly stated only in Italy for the social security payments? From what you are saying, the fact that we have dual citizenship does not matter either?
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JacksterJam
4/3/2017 18:26 EST
Lisa, I think it harkens back to my thought that one needs to read the entire treaty to see how one article might have an affect on another. Just reading Article 18 regarding social security benefits in isolation is most likely the problem. I'm not surprised. I can't imagine the U.S. giving up any tax money they don't have to give up. The U.S. taxes people based on citizenship, so if you are a U.S. citizen, no matter where in the world you live, your income is taxed with very few exceptions, if any. You've heard about people living outside the U.S. who give up their U.S. citizenship; taxation issues are often a major reason. Italy taxes one based on residency, not citizenship, although it can change certain particulars. For example, my pension is derived from government work in the U.S., so Italy does not tax it per Article 19 of the tax treaty. However, if I were to become an Italian citizen, then Italy will tax it. The whole thing is pretty tricky. I personally think the tax treaty is written so that no one can really fully understand it. lol A friend of mine, who is an attorney from the U.K., as well as an accountant, told me that he thinks the U.S. tax treaty is the worst he has read compared to those of other countries. Sigh.
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LisaC1
4/3/2017 18:42 EST
Hi Jackster,
I haven't actually started using the accountant that I have been corresponding with but if I do, I will definitely ask her. I have asked her a lot of questions already, so don't know if it is appropriate to ask any more of her at this time. I, too, thought that the US would tax the social security benefits if my income is over the threshold but guess I will find out for sure once we file!
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JacksterJam
4/3/2017 18:56 EST
Hi Lisa. Yes, I think for the most part that the credit one receives for paying taxes in the other country is about as much as we can hope for. When I read the section on taxation of earned interest, my head starts to spin. I suspect that I'm paying one country or the other too much tax on interest, dividends and capital gains, but I haven't had the energy to figure it out. One of these days, I'll get to that. Ha!
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rsetzer99
4/4/2017 02:57 EST
Jackster seems to have covered it, so I will just toss in the agreement. You read the treat and think, hey, only Italy taxes my SSN, then that Savings Clause comes about and more or less says, - We didn't mean it, you have to pay us tax.
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whidden39
From: NULL
4/4/2017 06:12 EST
Sorry for being off-topic, but over the past week I have been receiving two copies of every post in this forum. Is this happening to others?
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carolian
From: United States
4/4/2017 20:23 EST
I've been getting repeat messages too -anywhere from two to four times !
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