Americans Moving to Italy

4 Important Financial Implications of Moving to Italy

The art, culture, scenery and food of Italy make it an enticing destination for Americans wishing to live overseas. If your dreams include making Italy your home, it’s important to be aware of the following financial planning implications.

#1 – Italian taxes

For taxation purposes, Italy treats tax residents and non-tax residents differently. Tax residents are taxed on worldwide income, while non-tax residents are only taxed on Italian-sourced income. You’re considered a tax resident in Italy if you’ve lived in the country for more than 183 days during a given tax year and meet any of the following criteria.

• Maintain an established home in the country

• Maintain an established center of business and/or social interests in the country

• Are registered with the Italian public registrar

As a tax resident of Italy, you’ll need to pay taxes on your worldwide income, regardless of where that income is produced. Taxable income includes earned income as well as income from real estate, dividends and capital gains.

Under the current tax regime, the following tax rates typically apply to tax residents of Italy.

• Regional income tax – 1.23%-3.33%

• Municipal income tax – 0%-0.8%

• National income tax – See the table below

In an effort to encourage high-net-worth expats to move to Italy, the country offers a special tax regime for new residents. An individual who has been a non-tax resident of Italy for at least nine of the last 10 years may be eligible for the following tax benefits.

• A five-year personal income tax exemption of 70% (northern regions) or 90% (southern regions) on any employment, self-employment or business income for working individuals.

• An extension of this tax exemption for an additional five years if a taxpayer meets certain conditions. The extended exemption begins at 50%; however, individuals with at least three dependent children may be eligible to exclude up to 90% of their income.

• Based on new tax regulations introduced in 2019, any foreign income of a new resident living in southern Italy is taxed at rate of 7% for 10 years. This includes pension income, capital gains, dividends, rental income and Social Security benefits.

#2 – Tax treaty

The United States maintains a tax treaty with Italy that is intended to prevent double taxation on income and capital gains. The treaty’s provisions include the following.

• Capital gains tax –A flat 26% capital gains tax rate applies to the sale of securities.

• Real estate tax –Sales of Italian property are taxed at 20% if the property is sold within five years of purchase and not held as an individual’s primary residence for most of the five years. After five years, there’s no capital gains tax on Italian property sales.

• Net wealth tax – Italian tax residents are subject to a wealth tax on investments and real estate owned outside of Italy. Financial assets held outside the country are subject to a 0.2% wealth tax, while real estate held abroad is taxed at 0.76% of fair market value.

As noted above, individuals who qualify under Italy’s special tax regime for new residents are exempt from declaring foreign assets for tax purposes and aren’t subject to the wealth tax.

#3 – Retirement income

Pension payments and traditional IRA distributions are considered taxable income by the Italian government. Because Italy has a progressive tax rate, an individual’s exact tax liability depends on their total annual income.

Like many countries, Italy doesn’t explicitly recognize the tax-exempt nature of Roth IRAs distributions. That means withdrawals from these accounts may be treated as ordinary income. When you withdraw from Roth accounts as an American expat living in Italy, you may be double taxed on that money, because contributions were made with after-tax dollars and withdrawals would most likely be taxed.

So, if you’re an American planning to move to Italy, consider withdrawing from your Roth accounts before moving to ensure your distributions aren’t taxable. Before you decide on a strategy, be sure to consult with a qualified expat financial advisor to ensure your decision is in line with your overall financial strategy and long-term goals.

#4 – Estate planning

As an American citizen living in Italy, you may be subject to Italian inheritance laws if you die without the necessary estate planning documents in place.

In contrast to the United States, where individuals are free to pass along their assets to anyone they wish, Italian estate planning law clearly establishes how assets are to be distributed. Under Italy’s “forced heirship” law, individuals cannot disinherit immediate family members or leave them a share of the estate that is less than the law dictates. Only when an individual has no legitimate heirs in Italy or elsewhere can he or she dictate how the estate is distributed.

The following table shows the minimum required distributions to various family members.

* This amount is to be split in equal shares between all children.
** The spouse maintains the right to continue living in the family home.

It’s also important to note that the taxation of inherited and gifted assets depends on your residency status. If you’re a tax resident of Italy (you spend more than 183 days living in the country in any given year), you’ll be taxed on the value of your worldwide assets. Non-residents and expats who qualify under the “new resident” regime are only taxed on Italian assets.

Could you use some help preparing your finances for a move to Italy? Creative Planning International is here for you. We specialize in helping U.S. expats and cross-border families maximize their wealth and avoid costly mistakes. We understand the complex interactions of multi-jurisdictional tax and regulatory regimes and help clients develop operationally and financially efficient retirement and wealth management strategies. Because we serve in a fiduciary capacity, you can be confident we’re acting solely in your best interests.

For more information, request a meeting with a member of our team.