If a US citizens works in Italy, do they still need to file taxes back home?
Yes. An an American citizen you’re taxed on your worldwide income regardless of where you live in the world. This means US citizens working in Italy pay Italian taxes, but must not forget they still need to declare their earnings back home.
What does the process involve?
The key thing is to file a tax return in Italy, then file in the US. The two countries have an agreement which means the IRS tax authority in the US will make sure citizens are not being double taxed.
Whether it’s wages, dividends or other forms of income, one country will offer the other certain credits. In most cases Italian taxes are higher than US taxes, so you don’t have to pay anything in the US.
What happens for people earning money in both Italy and the US?
US citizens earning money in both countries are typically tax residents in Italy, meaning their income is declared in Italy but they still need to file taxes back home afterwards.
What if you're self-employed?
The US has income tax and self-employment tax. You could have no US income tax liability but could still have around 15 percent of self-employment tax to pay. This catches a lot of people out.
If US citizens work for a tax-free international organization, do they still have to file taxes in the US?
Whereas UN staff are exempt from income tax in Italy, the same cannot be said for the organization's staff in the US and so employees in Italy still have a US tax liability.
But the UN and international organizations provide a tax equalization policy, so if an American is working for FAO (Food and Agriculture Organization) the organization will reimburse them for the US tax paid.
But it's worth noting that while an international organization will reimburse US citizens for the tax, they won’t pay for any penalties if their employees file taxes too late.
When does this all have to be done?
Tax for the previous calendar year needs to be paid by April 15th. However, expats have a three-month extension to get all the paperwork together which is due by June 15th.
What happens for people who don't file their taxes in the US?
The consequences can be costly. For people who fail to file their taxes correctly in the US, they face a penalty of up to 25 percent of the sum plus interest.
What's the best way to stick to the rules?
Find out what your liabilities are, don’t assume you don’t have to file. It’s a very unwelcome surprise to go back to the US and find out you’re not compliant.
The biggest thing is to ask questions. The easiest thing to do is call someone and ask them to talk you through the process.
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