Italy and US Taxes: What American Expats Need to Know

Italy introduced a flat tax regime in 2017 that lets new residents pay a flat annual payment of 100,000 euros on all foreign-source income, regardless of the actual amount, if they haven't lived in Italy for at least nine of the previous ten years. This can be an excellent deal for high earners, but US citizens face a complication: the lump-sum payment may not fully qualify as a creditable foreign income tax under the Foreign Tax Credit rules, since it is not computed on actual income. Italy's standard income tax rates for those outside the flat tax regime reach 43%, and the totalization agreement with the US covers social security contributions. The US-Italy tax treaty is generally favorable and includes provisions for pensions and dividends, and US Social Security benefits paid to Italian residents are generally taxable only in Italy under the treaty. Italian mutual funds and investment products are typically PFICs, so US expats in Italy should keep their long-term investment accounts with US brokerages when possible.