Many Americans dream of living abroad, and some are lucky enough to settle down in beautiful Italy. While living in Italy might be a dream come true, you should be aware of potentially complicated tax situations.
Expats from the United States are often still obligated to pay their U.S. taxes. You might be living in and working in Italy, but if you are still an American citizen, the tax man will find you. The United States taxes its citizens on their global income, meaning the money you earn while living in Italy may be subject to U.S. taxes. You might be considered a legal tax resident, depending on your living situation in Italy. In that case, you might also be obligated to pay Italian taxes. Being taxed on your income by two different countries can get expensive fast. Our team can help you figure out how to minimize your U.S. tax obligations. Foreign tax credits based on the taxes you pay in Italy might be available. Similarly, you may exclude income you earn from foreign sources up to a certain amount.
Call US Tax Help at (541) 362-9127 for assistance filing your taxes while living abroad in Italy.
How Do U.S. Expats Living in Italy Pay Taxes?
As the old saying goes, nothing in this world can be said to be certain except death and taxes. Americans living abroad are often still obligated to pay their U.S. taxes. They might also be obligated to pay taxes in their new country of residence. Having tax obligations in multiple countries can quickly become overwhelming. Our team is ready to assist you with your taxes.
U.S. Taxes
According to the IRS, American citizens are taxed on their worldwide income. This means that income from all sources is subject to taxation in the United States as long as you are a United States citizen. For citizens living in the United States, taxes can be relatively simple—at least as simple as taxes can be. However, the situation becomes far more complex for American citizens living abroad.
U.S. citizens living in Italy, or any other country for that matter, must submit their taxes the same as everyone else. The good news is that people residing overseas get an automatic 2-month extension on their taxes.
You should consider where your income comes from. Some people live abroad while working for a business or company based in the United States. Others move to Italy and find work for Italian businesses. Remember, the U.S. will tax your worldwide income, but Italy might also tax your income.
Italian Taxes
When it comes time to pay taxes, U.S. expats often fear being taxed twice on the same income. This is a real possibility if you are a tax resident of Italy. The next question is, how do you know if you are considered an Italian tax resident?
Each country determines its own tax residency status. This means Italian law, not U.S. law, determines whether someone living in Italy is obligated to pay taxes. If you live in Italy for a certain period of time, have a residence in Italy, or your life generally centers on Italy, you might be considered a tax resident.
You can talk to our team about your living situation in Italy. Someone living in Italy for a few months for work is probably not considered a tax resident. If you move to Italy on a more permanent basis and put down roots, you are more likely to be considered a tax resident.
How to Avoid Paying Taxes Twice as a U.S. Expat Living in Italy
The United States offers several legal options for expats with tax obligations in other countries. You face taxation on multiple fronts if you are an Italian tax resident and a U.S. citizen. Fortunately, there are ways to reduce your tax obligations in the United States if you are also paying taxes abroad.
Foreign Tax Credit
If you have paid taxes in Italy, you might be eligible to claim a foreign tax credit in the United States. The amount of money you pay in taxes in Italy may be taken as a deduction on your United States taxes. You may apply this deduction on tax Form 1040. You cannot claim a foreign tax credit if you instead elect to use the foreign-earned income exclusion described below.
The foreign tax credit only applies to income that is taxed by both Italy and the United States. If you are not taxed on your income by the Italian government, you likely cannot claim a foreign tax credit. If you pay $1,000 in taxes in Italy, for example, you may deduct that much from your U.S. taxable income.
Foreign Earned Income Exclusion
If you live in Italy because you work for an Italian business or company, your income may be considered foreign-earned income. In such a situation, you can use the foreign-earned income exclusion to reduce your tax obligations in the United States.
To claim this exclusion, your income must be derived from a foreign source, and your tax home must be in a foreign country. You must also be one of the following things:
A U.S. citizen who resides abroad for an uninterrupted tax year, a U.S.
A U.S. resident alien or foreign national from a country with an income tax treaty with the U.S. who lives abroad for an uninterrupted tax year.
A U.S. citizen or resident alien who is present in a foreign country for no less than 330 full days during any consecutive 12-month time.
The amount of income you may exclude from your U.S. tax obligations is adjusted yearly. As of 2023, the limit was $120,000. If you make less than the limit, you might be able to exclude your entire foreign-earned income from your U.S. taxes.
Call US Tax Help for Help with Your Taxes
Call US Tax Help at (541) 362-9127 for assistance filing your taxes while living abroad in Italy.