[Expat tax filter] U.S. citizen in Italy - how to minimize taxes

June 3, 2017 9:53 AM

What's the ideal financial situation for a U.S. citizen living permanently in Italy, for the purpose of paying the least amount in taxes and still having a comfortable lifestyle with some flexibility?

Assume for the purpose of this question that the individual has an address in the U.S., but realistically lives 100% in Italy, legally. She will be living in Italy year round, with travel adding up to less than two months a year, some of it back to the U.S., and some not. She will not be an Italian citizen, or at least not for several years.

For this question, all sorts of options are available:

- Own property in the U.S. and/or Italy, or no property at all
- Maintain investments in any location
- Income from U.S. salary or business; Italian salary or business; investment income; alimony; social security; retirement (pension, IRA, 401(k)); rent (from property in U.S. or Italy); annuity payments; payments on a loan previously made
- Debt can be zero, or there can be debt held in the U.S. or in Italy
- The individual can manage the money online or have a money manager in the U.S. or Italy

The only options not available are:

- Having very little income or assets (although to the extent that it's at least mostly legal, it is possible to have some assets in another person's name (not a spouse))
- Avoiding the 163-day residency limit in some way or
- Abandoning U.S. citizenship.

If you were to design a financial structure that would pay the absolute least amount in taxes, legally, what would you do, and how would the taxes work out? I ask so that I can know the minimum amount that could conceivably be taxed, in order to evaluate possible options against that target.

posted by Capri to Work & Money (10 answers total)

Assuming primarily Italian income, there's a fairly generous foreign earned income exclusion for US citizens living abroad. But if you're going to benefit from services provided by the Italian state, it seems churlish to attempt to avoid Italian tax.
posted by hoyland at 10:21 AM on June 3, 2017

Response by poster: [I am trying to avoid the 75% tax I estimate I will pay, to the U.S. and Italy combined, under current circumstances. I am not trying to avoid Italian taxes so much as to avoid paying so very, very much in Italian+U.S. taxes. As I know that this is the high end of the scale, I'm trying to gauge what the low end of the scale looks like.]
posted by Capri at 10:24 AM on June 3, 2017

I'm confused as to why you estimate you would pay so much to both US and Italy. As you are an American citizen you must always file your tax returns with the IRS, but the US will have a double taxation treaty with Italy ensuring you don't pay tax twice on the same source of income. And your first $90,000+ of income is exempt from ANY US taxation when you are resident abroad. Rules may be different for foreign pension plans and capital gains, but income is fairly straightforward.
posted by oneaday at 1:05 PM on June 3, 2017 [3 favorites]

[I am trying to avoid the 75% tax I estimate I will pay, to the U.S. and Italy combined, under current circumstances.

Either you have completely misunderstood your tax situation or you have an extraordinarily unusual situation that you have not outlined.
posted by the agents of KAOS at 2:08 PM on June 3, 2017 [9 favorites]

Response by poster: Can someone please answer the question, and not divert the thread to discussing the reasons why I asked the question? I really am looking for an answer to the question exactly as it is written. Thank you.
posted by Capri at 5:53 PM on June 3, 2017

Nobody can give a good answer with the limited information available. You can start by reading the IRS guidance on foreign tax credits, but for better strategies you really need to talk to a professional with all your financial details.
posted by the agents of KAOS at 6:42 PM on June 3, 2017 [4 favorites]

Response by poster: This is a purely hypothetical question. It doesn't require any knowledge of my situation, as I clearly specified. If you don't understand expat taxes, don't address the question at all then. But if you do, some help would be appreciated. The value to me, as I said, is in understanding what situation would result in the lowest tax burden. It's valuable to me to see what the outer bounds of the situation are. If you can help with that, I would very much appreciate it.

Obviously I can talk to a tax professional, and a large number of AskMe questions could be addressed by paying someone. I'm looking for the community assistance that so many of us seek.
posted by Capri at 8:03 AM on June 4, 2017

Hi Capri, I'm sorry but I'm an expat paying taxes in Japan and I don't understand the question either as-written. Because my income is under the foreign tax exclusion threshold I only pay local taxes, like other folks have said. Owning property or investing money, other stuff is another story, but the question as written is too broad to know what you want. If you're not comfortable with giving specifics, maybe use the anonymous question function?
Take care.
posted by sacchan at 9:00 PM on June 4, 2017

I am an expat living in Germany. I am not a tax accountant. I have a tax accountant who specializes in US citizens living abroad, and she has been tremendously helpful when it comes to exactly the type of question that you are asking.

However, my accountant was also careful to avoid any kind of recommendations outside the two countries under consideration, and it came up because my partner is not a citizen of either of these two countries. In the most general terms, I will say that both real estate and long term capital gains (in a US bank) were recommended for low taxes. Is that still true for the US + Italy combination? I have no idea ...

Also, you shouldn't ever have your income double taxed when it's up to a certain fairly large amount -- think alternative mimimum tax levels. If your income is or will be above this amount, then the fee for a professional consulation will be miniscule in comparision and you really ought not to be taking advice from the internet.
posted by cotterpin at 4:33 AM on June 5, 2017

There's are reasons why everyone is saying '"talk to a professional with all your details". Why would you not seek a professional's advice when it's your entire tax liability at stake?

I'm sorry, but any answers to your hypothetical questions WON'T HELP YOU.
posted by lalochezia at 8:51 AM on June 5, 2017