It is sometimes said that tax evasion is the Italian national sport. Seriously, taxes in Italy are high and it is often difficult to determine what you owe. There can be wide variance of opinion on the latter topic. Your will almost certainly want to arranges for the services of a local tax accountant (commercialista).
If you live in Italy for more than 183 days in a year and received any income, you almost certainly have to file an Italian tax return as well as a US one (assuming you’re a US citizen). If you are a resident, Italy taxes your worldwide income. One of the primary means for determining residency is registration in a comune. So, before you depart Italy for a long period of time you should think about unregistering from your comune, or registering in A.I.R.E. (registry of Italian citizens abroad) if you are an Italian citizen.
Here are the Italian taxes that we know about.
IRPEF (‘Imposta sul Reddito delle Persone Fisiche’)
IRPEF is the standard Italian progressive income tax. It applies to earned income, passive income from activities such as property rental, and pension income (including IRA distributions). The tax rate is based on income starting at 23% and topping off at 43% for income above €75000. Taxes are computed per individual. There is no concept of joint filing. There are a small number of allowable deductions from taxes owed, for example a certain percentage of medical expenses. Tax paid to other countries is also deductible.
Estimated IRPEF payments of 40% and 60% are due for the current tax year on 30 June and 30 November (of 2020 for tax year 2020), or the next subsequent business day in the case of a weekend. Accounts are settled between estimated and actual payments when filing the yearly return in the subsequent year (as in the US).
There are regional and city taxes amounting to maybe 2% depending on location. These are incurred along with IRPEF on the same income.
Substitute Tax (on passive income outside of Italy)
Passive investment income (interest, dividends, capital gains) generated outside of Italy is generally taxed at 26%. Certain types of income (on government bonds) are taxed at a preferred rate of 12.5%. Payment of this tax is on 1 July of the following year, there is no estimated payment in advance. There are no deductions, including payment of tax to other countries. You should probably check with your commercialista about which types of US investments are eligible for the substitute tax rate rather than the regular income rate.
Ideally, income earned and capital gains should be reported at the exchange rate of the date of transaction. This makes bookkeeping a bit of a pain, and it can make a big difference for capital gains and losses, since these must now also account for currency fluctuation.
IVAFE (‘Imposta sul valore delle attività finanziarie detenute all’estero’)
IVAFE is a wealth tax on financial assets held outside of Italy. The holder must pay 0.2% of the value of those assets at the end of the calendar year. Estimated payment is made on the same schedule as IRPEF.
IVIE (‘Valore degli immobili situati all’estero’)
Italy taxes property owned abroad at 0.76%. However, if tax on the same property is paid to a foreign state, those payments offset IVIE. The basis on which IVIE is charged is a bit murky. If you can prove the price you paid your house, that can be the declared valuation for IVIE. Otherwise your basis is market value, whatever that means.
TARI (‘Tassa sui Rifiuti’)
Comunes tax businesses and residents for garbage collection. For residential property, the rate is based on the registered size of the dwelling. TARI in Ascoli is due in 3 installments starting in April. For a huge apartment, the rate is a bit under €600 per year.
Retirement accounts (IRA, 401k)
The taxation of US tax-deferred retirement accounts is not well-defined in Italian law. There are two schools of thought. The first is that IRAs are taxed similarly to Italian previdenza complementare (supplementary pensions). In this scheme, income arising within an IRA account is taxed at a 20% rate while the beneficiary is retired but not receiving distributions, and then distributions are taxed at the IRPEF rate excluding what has already been taxed. The other interpretation is that distributions from such accounts are taxable at IRPEF rates as regular income, but that income within a IRA or a 401k is not taxable. The taxing authority has not yet opined about which treatment is definitive. Don’t hold your breath.
Similarly, there is an open question about whether pension accounts are subject to IVAFE. The reigning opinion is that they are not. But again, there is no certainty.
There is no Italian analog for a Roth IRA account. It would probably be wrong to assume that income in such accounts would remain tax-free in Italy.
If you are employed in Italy and trying to contribute to a retirement account, we can’t help you.
VAT (Sales Tax)
VAT is incorporated into the price of everything you buy. There are various rates, but the most common is currently 22% (the rate for groceries is less). VAT applies to professional services (realtors, accountants) as well as physical products. In most situations, the shelf price or the menu price includes VAT. For professional services, the VAT is usually added afterwards.
There is a tax treaty between the US and Italy to prevent double taxation. Rendering the language of this treaty into the boxes of an IRS form is not a trivial enterprise. Among other things, it says that certain US pension income (for example Social Security income) is taxable only by the country in which you are residing. In order to get relief under the tax treaty, it is sometimes necessary to treat income earned in the US as if it were earned in Italy (because the US only allows credit for tax paid on income earned in Italy). Things are made more complicated by the fact that the Italian Substitute Tax does not allow deductions for US taxes paid. The bottom line is that this stuff can be tricky, but it is workable.
Since Italian taxes are generally higher, many retirees pay taxes to Italy (first) and then file a net zero return in the US (later).
Filing and Paying Taxes
The Agenzia delle Entrate is the Italian version of the IRS. This office collects money for all sorts of government functions including taxes and voluntary healthcare inscription fees.
Income taxes are reported electronically to the Entrate using one of two methods: the Modello 730 or the Redditi PF (Unico). The two forms have different deadlines: 23 July and 30 September, respectively. The former seems commonplace for working people with regular incomes. The latter is more common for folks who have foreign income and other unusual situations (like US expats).
Your commercialista can help you file these tax forms. In Ascoli, several of us use dott. Giorgio Marilungo (firstname.lastname@example.org), a reputable and friendly commercialista who is used to dealing with expats with minimal shared language.
Taxes are paid using a form F24 digitally sent from your bank account (or post office). You can do this yourself, or delegate your commercialista to do it for you. The relevant payment dates are 30 June and 30 November. The filing deadline for the PF form is 30 September, but you have to pay any difference between estimated and actual taxes by 30 June to avoid penalties.