As stated elsewhere, Search Party isn’t providing any legal or tax advice, but hopefully this information can provide practical information that you can use to make your personal plans related to paying your taxes. Make sure and check with your tax consultant and sending agency related to your planning for taxes while living overseas.
US Taxes
- First, the good news. While living overseas, the US federal governmental doesn’t charge you for income taxes, as long as your income don’t go above their defined threshold. You can read about the Foreign Earned Income Exclusion on the IRS’s website.
- That said, unless you have opted out of social security, you do still have to pay FICA taxes (Social Security and Medicare) on your adjusted gross income, regardless of the fact that you aren’t paying income taxes. Depending on how you are employed by your sending agency, you may receive a W-2 (as an employee) or a 1099 (as an independent contractor), and that will help determine how you will pay your FICA taxes.
- Each year, you still have to file your tax return in the US, whether you are paying income tax or not.
- US citizens abroad are provided automatic extensions for filing their taxes. See more information on the IRS website. We have found that this can be particularly helpful in your first year so that you can qualify for the Foreign Earned Income Exclusion.
Italy Taxes
- While the US doesn’t charge you income tax, Italy does. Make sure and take some time to read through these articles:
- Requirement to file taxes in Italy
- https://europa.eu/youreurope/citizens/work/taxes/income-taxes-abroad/italy/index_en.htm
- https://www.taxesforexpats.com/italy/us-tax-preparation-in-italy.html
- https://internationalliving.com/countries/italy/taxes/
- https://brighttax.com/blog/us-expat-taxes-americans-living-italy/
- https://protaxconsulting.com/blog/us-expat-taxes-filing-as-american-living-in-italy/
- https://home.kpmg/xx/en/home/insights/2011/12/italy-income-tax.html
- Tax deductions in Italy
- Requirement to file taxes in Italy
- In Italy, a tax preparer is referred to as a commercialista. We have worked with a few commercialistas to date who have charged a minimum of €500 to prepare the Italian taxes. In each case, we have prepared our 1040 tax return in the US and then provided the completed 1040 to the commercialista to complete the tax preparation in Italy. They will also provide you the information that you need for any taxes that you owe in Italy.
Working with your Sending Agency
It is very important to work with your sending agency to understand what types of expenses can be submitted for reimbursement instead of being counted as income. The reason for this is that your gross income will be taxed in Italy for income taxes, whereas reimbursed expenses will not be as that money will not show up in your W2 or 1099 income reporting.
To use a simple example, if you have $1000 in total money, but $200 of that money was reimbursed to you as an expense, you will be taxed on $800, not $1000. This tax savings will show up both for your US FICA taxes as well as your Italian income taxes.
In addition, you should consider requesting a housing allowance from your sending agency. You must be ordained and an employee of the organization, receiving a W-2 to qualify for the housing allowance. To be clear, you cannot be a self-employed contractor receiving a 1099. If you meet these qualifications, then the housing allowance should be excluded from your gross income. You can read more about this on the IRS website. This exclusion will help you for your income taxes, but these monies will still be taxed for your FICA calculations.
Ongoing Businesses
If you have ongoing business interests in the US, we recommend that you consider setting your business to file taxes as its own entity. Frequently, businesses are opened as LLCs, and the taxes are often then calculated on the tax return of the individual who opened the business or who is a partner within it.
However, in Italy, this does not work well as Italy does not allow business expenses to be deducted from your income in the same way that is allowed in the US. As a result, the gross income received by the business is taxed regardless of the expenses that you may have for that particular year. Not fun!
As a result, we recommend filing taxes for the business in the US as its own entity, receiving all due deductions for the business without the gross income for the business being displayed on your individual tax return.
Varying Opinions
There are many different opinions and ideas about how taxes work while living overseas. Many people have said that they don’t need to file taxes in Italy or they can manipulate the system in other ways. Again, we are not experts, but we do believe that what is written above is required.
You may find that experts in the US will advise you based on US-based rules. We have seen situations like the one mentioned in this article. Be careful from whom you are taking advice!
You might find reading some of these articles, even if some of them are a little older, pretty helpful, related to taxes:
