Expats in Italy
If you have gone through the long process of obtaining the Italian permesso di soggiorno—also known as the residence permit or green card, then your next step (if you plan on working) is figuring out how to properly pay taxes in Italy. Permanent residents and US citizens who earn over the standard deduction amount (usually $100,000/year) anywhere in the world must file US tax returns every year with the federal government.
If you plan to work in Italy, most likely you will need a work permit and for this you will need the permesso di soggiorno, or even a permanent residence permit. There are different types of work permits which will, to some extent, determine the amount of taxes you will pay. For example, a freelancer (lavoro autonomo) through a reduced tax regime (regime forfettario) will pay about 15% of their income to taxes for the first 5 years, an additional 25% of their income will go to the INPS, the Italian Social Security institution. 15% is surprisingly low and it is one of the early benefits of being a freelancer due to the lowest income bracket otherwise being 23%, and this is a good solution while you try to get your feet under you in Italy.
Interestingly, income from work as an employee or self-employment pursued in Italy is generally taxed at 30% of the amount, or 10% if the worker becomes a resident in one of the following regions: Abruzzo, Molise, Campania, Apulia, Basilicata, Calabria, Sardinia or Sicily—that is, one of the regions that are struggling with underpopulation.
The United States is one of the few remaining governments that taxes the income that its citizens earn while working abroad. However, with certain countries there exists a Totalization Agreement which offers benefits to citizens of both countries, the US and Italy being a good example due to their historically good relationship. It is important to note that the Totalization Agreement only applies to citizens of the two respective countries, and that third-party nationals—green card holding or not—are excluded.
This 1978 agreement between the United States and Italy improves Social Security protection for people currently working or who have worked in both countries. Without this agreement, they would not be eligible for many of the benefits sometimes taken for granted today: monthly retirement, disability or survivors benefits under the Social Security system in either country. The agreement also helps people who would have to pay Social Security taxes to both countries on the same earnings, something that is very limited today.
The US–Italy Tax Treaty means that the Italian government can send US expats’ Italian tax information directly to the IRS which also includes their Italian bank and investment account details and balances, all of which is easily verifiable. This means that, using Form1040, regardless of where they live or where their income is generated Americans still have to file a return, even if they do not actually have to pay those taxes.
Paying Taxes in Italy
The amount of taxes you will pay each year not only depends on how much you earned but on what your tax regime as well, that is, whether you work with the partita iva (VAT) or are an employee for a company.
Generally, the tax rate slides between brackets from 23-43% largely depending on the amount of income. So, 23% on incomes up to €15,000 all the way up to 43% on incomes over €75,000. There are municipal taxes, ranging from 0-1% along with regional taxes as well, but those usually range from 1-3%. If you happen to have investments, those are taxed as well: dividends, interest, and capital gains are subject to a flat tax rate set at 20%.
No tax extensions are available in Italy, and penalties for filing your taxes late are quite high. If they are filed more than 30 days past the due date, penalties can range anywhere from 120% to 240%. In order to avoid penalties, the best solution is to have an accountant file the taxes for you; this will also help to maximize your possible tax return and claim any write-offs you may have.
In certain cases, non-residents are able to work in Italy for brief periods of time, usually through the granting of a special visa for short business trips. As far as foreign income is concerned, taxpayers who are residents of Italy will pay taxes on their worldwide income while those who are not tax residents of Italy will pay taxes only on their income from Italian sources. You are considered a tax resident of Italy if you spend more than half of the year, i.e, 183 days, in the country.
Being a dual citizen of both Italy and your home country can be a tricky or confusing situation. If you are an American citizen who has their residency in Italy then you do not pay taxes to the US Government, but only to Italy, thanks to a number of bilateral agreements. In that case, however, you are still required to file an income tax return with the IRS in the United States, though you will not be taxed unless the amount is over $100,000—this amount changes yearly. Additionally, any savings accounts held in other countries should also be reported to the tax authorities regardless of the amount held. Thanks to that same Totalization Agreement, dual citizens pay taxes only to the country they reside in 183 days of the year.
The cost of living is something that should be taken into account when considering work in Italy. If you are a freelancer then you alone are responsible for setting aside the proper amount of taxes to be paid at the end of the year whereas if you are employed by a company through a contract, then it is generally the company who will withhold a majority of the taxes from each paycheck. When negotiating salaries or hourly rates, it is important to keep this in mind as it will affect the amount of money you actually take home.
Do you want to learn about this subject more? Then, read our related articles such as, Average salary in Italy: gender, region and cities’ differences, Why Italy is your next destination, Becoming an Italian resident : our useful guide and Mandatory Employee Benefits in Italy