Italy Forum

majgroves
Joined 2017
Posts: 132

6 years ago

When Italy Taxes U.S. Social Security Benefits!

6 years ago

There was a lot of confusion in an earlier post thread on this subject but it seems clearer to me now. In the 1985 treaty, Italy did not tax the SS benefits of a U.S, expat. But that was changed in 2009! See below:
_________________________________
UNITED STATE-ITALY INCOME AND CAPITAL TAX CONVENTION
Entered into Force December 30, 1985

ARTICLE 18 Pensions, Etc.
1. Subject to the provisions of paragraph 2 of Article 19 (Government Service), pensions and other similar remuneration beneficially derived by a resident of a Contracting State in consideration of past employment shall be taxable only in that State.

PROTOCOL
ARTICLE 1
14. With respect to Article 18 (Pensions, etc.) of the Convention, it is agreed that social security payments and similar public pensions not covered by Article 19 (Government Service) of the Convention are covered by paragraph 1 of said Article 18 (Pensions, etc.).
----------------------------------------

*** In March 2009, Italy ratified a new income tax treaty with U.S.. which clarifies that social security or other similar payments made by one state to a resident of the other state shall be taxable only in the state of residence (see below).
_________________________________
ARTICLE 18
Pensions, Etc.

1. Subject to the provisions of paragraph 2 of Article 19 (Government Service), pensions and other similar remuneration beneficially derived by a resident of a Contracting State in consideration of past employment shall be taxable only in that State.

2. Payments made by a Contracting State under provisions of the social security or similar legislation of that State to a resident of the other Contracting State shall be taxable only in the other State.
----------------------------------------

So, it is very clear that only Italy can tax your SS benefits. Or is it? Remember, each year the SSA sends you and the IRS a SSA-1099. This must be claimed as income on your form 1040. So, now both countries are taxing you on the same source of income. Yet I believe you can claim a credit for what you paid Italy, but only after the fact. The only way I can see to do this is through the Foreign Tax Credit and you need to provide proof you paid the taxes to Italy.

Note: Pub 54 "Tax Guide for U.S. Citizens and Resident Aliens Abroad" mainly addresses taxes paid on foreign income because of its complexities and that is the most common use of the tax credit.

But, in reading other sources, I have come to the conclusion (without an experts opinion) that if a foreign country "imposes" (meaning you have no choice) taxes on the same income you must pay taxes to the IRS, you can claim a tax credit.

There are further complications. The U.S. taxes only a portion of your SS up to a max of 85%. But how does Italy treat it? How do they determine the tax rate? And what if you can claim a credit on your Italian taxes for what you paid the U.S.?

It was recommed to me that one should find a tax preparer that is capable of checking out all the options to determine your best approach.

Or better yet, go to France instead. Their treaty clearly states only the U.S. can tax your SS benefits. I'm open for any comments.

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