A Guide for Americans Retiring or Living Abroad
For U.S. citizens living in Italy, understanding how foreign pensions and U.S. Social Security benefits are taxed in Italy is crucial for financial planning and avoiding surprises. Italy, like many countries, taxes residents on their worldwide income, including pensions earned abroad. However, taxation depends on several factors: the type of pension, the country of origin, the existence of a tax treaty, and your residency status in Italy.
This article focuses on the treatment of foreign pensions, with specific attention to U.S. Social Security, as governed by Italian tax law and the Italy–U.S. Tax Treaty.
Fortunately, there are also tax incentives currently available for new residents, including the 7% Flat Tax for Foreign Pensioners and Impatriate Regime (Regime degli Impatriati) which can claimed.
General Rule: Worldwide Income Taxation
If you are a tax resident of Italy—meaning you are registered with the Anagrafe della Popolazione Residente and spend more than 183 days a year in Italy—you are subject to taxation on your worldwide income, including:
- Private pensions (e.g., IRAs, 401(k)s, U.S. employer pensions)
- U.S. Social Security
- Government and public service pensions
- Lump-sum pension withdrawals
These sources of income must be declared annually on the Modello Redditi (formerly Modello Unico) sections for income and financial disclosures.
Taxation of U.S. Private Pensions (e.g., 401(k), IRA, Employer Pensions)
Private pension income from the U.S. is generally considered taxable income in Italy and is treated similarly to Italian pensions. This means:
- The income is included in your total taxable income and subject to IRPEF (Italian personal income tax).
- IRPEF is progressive, ranging from 23% to 43% based on total annual income.
- Some regional and municipal surcharges may apply.
- No special exemption exists in the tax treaty for private pensions.
Withdrawals from traditional IRAs or 401(k)s are taxed when received, even if contributions were originally tax-deferred in the U.S. Roth IRAs are a gray area, and tax-free treatment in the U.S. is not guaranteed in Italy, especially for early withdrawals.
U.S. Social Security Benefits: How They Are Taxed in Italy
This is the area where the U.S.-Italy Tax Treaty (Article 18) provides a special rule.
Under the treaty:
- Italy has the right to tax U.S. Social Security benefits if the recipient resides in Italy.
- The United States does not tax Social Security benefits paid to U.S. citizens residing in Italy, provided they claim treaty protection via Form 8833 with their U.S. tax return.
In Italy, U.S. Social Security is treated as foreign pension income, and therefore:
- It is fully taxable in Italy, unless an exemption or reduction applies (none currently do).
- The income is reported under “Redditi di lavoro dipendente e assimilati” in the Italian return (typically Quadro RC).
- Subject to standard IRPEF progressive rates.
- There is no withholding by INPS or automatic tax deduction—you must declare and pay via self-assessment.
Government and Public Pensions
If you worked for the U.S. state or federal government, military, or certain public agencies and now receive a government pension, Article 19 of the U.S.–Italy Tax Treaty may apply.
- These pensions are only taxable in the United States if they are paid from a public fund for services rendered to the U.S. government.
- Italy is not allowed to tax these pensions.
- This typically applies to civil service, military, or certain state and federal government jobs.
- You must be a US Citizen, but also being an Italian Citizen does not preclude you from claiming treaty relief!
You must be able to demonstrate:
- That the pension is paid from public funds
- That it qualifies under the treaty
- The pension’s source and nature with supporting documentation
Lump-Sum Withdrawals and Commuted Pensions
Italy generally taxes lump-sum pension withdrawals (e.g., full IRA withdrawals, early 401(k) distributions) as ordinary income, regardless of how the U.S. treats them. Even if the U.S. imposes an early withdrawal penalty or taxes them favorably, Italy may apply full IRPEF rates on the gross amount.
There is no exclusion or reduced rate for lump sums unless they are governed by a special treaty clause, which Italy and the U.S. do not currently provide.
Tax Reporting Obligations
- Declare pension income annually on Modello Redditi PF.
- Use Quadro RW to report any foreign accounts (e.g., IRA custodial accounts, U.S. bank accounts).
- Failure to report pensions or accounts may result in penalties, even if no additional tax is owed.
Additionally, U.S. citizens must continue to file U.S. tax returns annually and may need to file Form 8938 (FATCA)and FBAR (FinCEN 114) if total foreign financial assets exceed thresholds.
U.S. Foreign Tax Credit vs. Exclusion
Because Italy taxes pensions heavily, many Americans in Italy find it advantageous to use the Foreign Tax Credit (Form 1116) on their U.S. return to offset any U.S. tax on the same income. However:
- Social Security benefits should not be taxed by the U.S. if the treaty is invoked correctly.
- FEIE (Form 2555) does not apply to pension income—it is only for earned income.
- You can use the FTC to avoid double taxation on private pension income, but you must report everything correctly on both sides.
Conclusion
Foreign pension income, including U.S. Social Security, is fully taxable under Italian law unless covered by a treaty exception. For Americans in Italy, this often results in a higher tax burden than they would face in the U.S. However, careful planning, correct reporting, and strategic use of tax treaties and credits can reduce or eliminate double taxation. Most importantly, understanding the Italian system and the U.S.–Italy treaty provisions is essential to maintaining compliance and avoiding costly errors.
As an Italian tax resident, you are required to report and pay tax on foreign financial accounts, including U.S.-based IRAs, Roth IRAs, 401(k)s, and brokerage accounts. These are subject to Italy’s IVAFE (Imposta sul valore delle attività finanziarie detenute all’estero), an annual wealth tax of 0.2% on the value of foreign financial assets as of December 31 each year. Even though retirement accounts are tax-deferred or tax-exempt in the U.S., Italy does not recognize this preferential treatment; they are treated as standard investment assets. These accounts must be declared annually on Quadro RW of the Modello Redditi, and failure to report them can result in significant penalties.
There are exceptions under certain special tax regimes, such as the 7% flat tax regime for foreign retirees moving to select municipalities in Southern Italy and the €100,000 flat tax regime for high-net-worth individuals, both of which may exempt you from IVAFE and reporting obligations. However, these regimes have strict eligibility criteria. For most Americans in Italy, compliance with IVAFE on retirement accounts is unavoidable, and proactive planning is essential to minimize risk and ensure full tax compliance on both sides of the Atlantic.
If you are unsure about how your specific pensions will be treated, or if you’re planning a move to Italy, consult a tax advisor experienced in both U.S. and Italian cross-border taxation before your first tax year as a resident.
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