This article is dedicated to all military or civilian personnel who have worked for a certain amount of time in a military base in Italy and who have decided, after retirement, to continue living in Italy.
The question is: what are their tax obligations towards Italy and the US?
Obviously it's not possible to give an answer for every case, as tax obligations depend on many subjective variables, but let's see what are the most important principles that one individual must follow after retirement from the military in terms of tax compliance.
1. THE STARTING POINT: A CASE STUDY
Let's begin our analysis by considering a case study that started with a precise client's request:
"I am an Italian Citizen who also holds American Citizenship and I have been permanently residing in Italy for many years.
I worked for several years in Italy, first in the military, then as a civilian still within an American military base.
A few months ago I applied for a Department of Defense pension.
I will also receive a Social Security Pension and I have a brokerage account and an IRA in the US.
Would it be possible for me to apply for a part-time job for an Italian Company as employee after retirement?
Can you please let me know what my tax obligations towards Italy and the US?"
This case study in question concerns primarily the taxation of pensions between Italy and the United States.
We have already treated about this in the following link:
Before delving into the analysis of Italian taxation for this case study, it is good to clarify a few basic points.
1. The individual of the case study is tax resident in Italy: once he quit the military, art 10 of SOFA (Status Of Forces Agreement) stop its application and the person must register himself/herself into the Anagrafe of the Comune where he/she lives.
So basic principle is that he/she must report all incomes (US sources and Italian sources incomes) into the Italian tax return and pay Italian taxes.
We will see later that there could be some exceptions on public pensions, but the general rule is that once the SOFA stops its application, the individual must pay the taxes in Italy as tax resident.
We have already analyzed SOFA in the following articles:
You can find more information on Tax Residence here:
In particular:
2. The individual is an American Citizen and consequently must file a Tax Return in the US every year, where he/she must report all income earned "Worldwide", as well as the FBAR form for all financial and investments accounts held outside of America. In the US tax return he/she must report US source incomes, as the DOD and Social Security pensions, but also the income from part-time employment in italy.
The taxes paid in Italy will reduce the US tax debt: there are two main methods to reduce double taxation issues; see the following articles:
How to reduce US taxes for US citizens living in Italy: Foreign Earned Income Exclusion (use the translate button on the right for the english version).
How to reduce US taxes: is it better the Foreign Earned Income Exclusion or the Foreign Tax Credit? (use the translate button on the right for the english version).
3. It's important to remember that the Foreign Earned Income Exclusion does not apply:
• to pensions, neither American nor Italian;
• to financial incomes like dividends, interests and capital gains;
• to distributions from IRA.
So, in summary, the most important principle to remember is this one:
If a US Citizen or a Double Citizen who is on a mission VISA in Italy stops working for the military, as military force or civilian personnel, and retire bu remain resident in Italy, there are the following tax obligations:
a) register into the Anagrafe Comunale of the city where he/she lives;
b) file the Italian tax return with all incomes, US sourced ones and Italian sourced ones;
c) pay the Italian taxes;
d) file the US tax return;
e) pay US taxes reduced by the taxes already paid in Italy.
2. ANALYSIS OF THE CASE STUDY: PENSIONS
Getting into the technical aspects, let's consider the pensions first.
The individual has a Public Pension from Department of Defense (DOD), a Social Security Pension and some possible distributions from IRA.
Now, distributions from IRA and Social Security are always taxable in Italy, and taxation is progressive.
About the Department of Defense pension, we need to refer to our article:
Art 19 of the Convention states:
"However, such pension shall be taxable only in the other Contracting State (ITALY) if the individual is a resident (YES, HE/SHE IS TAX RESIDENT OF ITALY) and a national of that State" (YES: SHE/HE IS AN ITALIAN CITIZEN).
So, also DoD pensions in our case study must be reported into the Italian tax return, as the individual is an Italian Citizen.
3. ANALYSIS OF THE CASE STUDY: FINANCIAL INCOMES.
When it comes to financial incomes, the principle is the same as before:
US interests, Dividends and capital gains must always be reported into the Italian tax return and taxed in Italy.
Taxation can vary from a 12,5% flat tax rate for interests from US treasury bonds and Municipal bonds, to 26% to interests, dividends and capital gains from bonds and share from US companies, to progressive taxation if the financial incomes come from ETF and US Mutual Funds.
You can find more details here:
4. ANALYSIS OF THE CASE STUDY: EMPLOYMENT.
Italian employment income is clearly always subject to Italian taxation but it's not subject to American taxation up to the limit established by the "Foreign earned income exclusion"; beyond this limit, this income will also be taxed in America, but the Italian taxes can likewise be deducted, which will be reported in America as a tax credit.
One important point to consider is this one: is it possible to apply to the Tax Break Impatriati if an individual retire from the military and continue living in Italy?
This is a very interesting question and we will get back about that in the future.
YOU COULD BE ALSO INTERESTED IN:
1) Our selection of posts related to "MOVING TO ITALY":
2) Our selection of posts related to "SOCIAL SECURITY AND PENSIONS":
3) The following posts:
CONTACT US FOR MORE INFORMATION
If you need more information on the Italian Fiscal Code or the opening of a Partita IVA, you can send an email to:
enrico.povolo@dottcomm.net
or make a phone call to the following number:
+39 0444 322987
Enrico Povolo