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‘Failing to file your US tax return can be costly’

Navigating the multiple layers of bureaucracy can be a huge challenge for Americans living in Italy, particularly when it comes to the tax system. The Local speaks to lawyer Timothy W Scott to find out how US citizens can avoid getting caught out.

Published: 21 October 2013 16:58 CEST
'Failing to file your US tax return can be costly'
Us citizens working in Italy still need to file taxes back home. Photo: 401(K) 2012/Flickr

If a US citizens works in Italy, do they still need to file taxes back home?

Yes. An an American citizen you’re taxed on your worldwide income regardless of where you live in the world. This means US citizens working in Italy pay Italian taxes, but must not forget they still need to declare their earnings back home.

What does the process involve?

The key thing is to file a tax return in Italy, then file in the US. The two countries have an agreement which means the IRS tax authority in the US will make sure citizens are not being double taxed.

Whether it’s wages, dividends or other forms of income, one country will offer the other certain credits. In most cases Italian taxes are higher than US taxes, so you don’t have to pay anything in the US.

What happens for people earning money in both Italy and the US?

US citizens earning money in both countries are typically tax residents in Italy, meaning their income is declared in Italy but they still need to file taxes back home afterwards.

What if you're self-employed?

The US has income tax and self-employment tax. You could have no US income tax liability but could still have around 15 percent of self-employment tax to pay. This catches a lot of people out.

If US citizens work for a tax-free international organization, do they still have to file taxes in the US?

Whereas UN staff are exempt from income tax in Italy, the same cannot be said for the organization's staff in the US and so employees in Italy still have a US tax liability.

But the UN and international organizations provide a tax equalization policy, so if an American is working for FAO (Food and Agriculture Organization) the organization will reimburse them for the US tax paid.

But it's worth noting that while an international organization will reimburse US citizens for the tax, they won’t pay for any penalties if their employees file taxes too late.

When does this all have to be done?

Tax for the previous calendar year needs to be paid by April 15th. However, expats have a three-month extension to get all the paperwork together which is due by June 15th.

What happens for people who don't file their taxes in the US?

The consequences can be costly. For people who fail to file their taxes correctly in the US, they face a penalty of up to 25 percent of the sum plus interest.

What's the best way to stick to the rules?

Find out what your liabilities are, don’t assume you don’t have to file. It’s a very unwelcome surprise to go back to the US and find out you’re not compliant.

The biggest thing is to ask questions. The easiest thing to do is call someone and ask them to talk you through the process.

Visit Timothy W Scott's website.

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TAXES

How does Italy decide if I’m a tax resident in the country?

Taxation in Italy is famously complex, often creating confusion about who's liable to pay taxes in the country and who isn't. But how do Italian authorities actually decide if you’re a tax resident?

Published: 17 September 2024 15:22 CEST
How does Italy decide if I'm a tax resident in the country?

Italy’s tax bureaucracy can be tough to navigate for Italians and foreigners alike, and situations such as frequent travel, vacation properties and remote work can all cause further confusion.  

Italian law defines a tax resident as anyone who lives in Italy for at least 183 days per calendar year (184 days in leap years). That includes anyone formally registered as a resident of Italy or simply residing here unofficially for more than half the year.  

Italian tax residents must pay tax on worldwide income, not just earnings generated in Italy. That’s why it’s especially important to know what the Italian tax office (Agenzia delle Entrate) considers when applying the 183-day rule – and how it knows how much time you spend in Italy.

The general rule  

For someone who splits their time among several places, the tax authority considers whether Italy is their “principal place” of business, economic interests and personal relations. According to a 2022 ruling from the Court of Cassation, Italy’s highest appeals court, officials look at whether the person owns property or businesses in Italy, has an Italian bank account, or has relatives here.

READ ALSO: Do I need to declare my foreign bank accounts to the Italian taxman?

If you don’t have European citizenship or an Italian immigration visa, you can only legally stay in Italy for 90 out of every 180 days. In that case, you probably won’t meet the 183-day rule.

Keep in mind, though, that the 183 days don’t have to be consecutive, and that short trips outside the country don’t necessarily count as not living in Italy for tax residency purposes if you have business and personal ties to the country.

Proof of residency

Tax authorities look at a variety of factors – some obvious and others less so – to determine how much time you spend in the country each year.

Anytime you enter or exit Italy directly to or from a non-Schengen Area country, your passport will be stamped, providing a record of how long you were in the country.

But given the EU’s open-border policy, tax authorities’ investigations go far beyond passport records.

Reports of wealthy Italians, especially celebrities, pretending they live in countries with a lower tax burden, like Monaco, have also forced the government to get creative.

In addition to property ownership and rentals, which are all registered with the government, tax authorities look at vehicle records, gyms and other club memberships, cell phone records, purchases for flights and train tickets to Italy, credit card use and postal records.  

In the case of celebrities, tax officials even use paparazzi photos and news stories to reconstruct a person’s movements; for the rest of us, social media posts and online activity can provide legally admissible clues about where we go and when.

Alternatively, if you’ve been accused of owing tax in Italy even though you spend most of the year in a different country, these are the types of records you can provide to show that you were actually living abroad.  

When in doubt, you can get a tax residency certificate from your home country stating you live and pay taxes there. If Italy has a double taxation agreement with the country, you will only be taxed in one place.

Paying tax on a holiday home

If you own a holiday home but live there for less than half the year, you will not become a tax resident of Italy simply by virtue of owning property here.

However, you’ll still need to pay any relevant property taxes and waste collection fees on the home.  

READ MORE: What taxes do you need to pay on a second home in Italy?

And any income that you earn in Italy – including from renting out a vacation home when you’re not there – is also subject to Italian taxation even if you’re not a tax resident.

Tax residency for digital nomads

In April, Italy introduced a new digital nomad visa for highly-skilled workers available to both freelancers and remote employees of international companies.

While the digital nomads will generally be legal residents of Italy who must pay tax in the country, some might qualify for a tax scheme for lavoratori impatriati (workers relocating to Italy), which only taxes 50 percent of their income.  

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