- The Harsh Implications of Citizenship-Based Taxation
- Investment Challenges in Italy for U.S. Citizens
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Moving to Italy in 2022 has been the highlight of my twenties. As a dual U.S. and Italian citizen, I feel immensely fortunate to live and work in Milan, and I do not have any interest in returning to my birth country of the United States, or to my previous home in Oslo, Norway.
With the luxury of a good job, life in Italy has surpassed all of my expectations. Unfortunately, my U.S. passport works overtime to try and rain on my Italian parade.
The Harsh Implications of Citizenship-Based Taxation
The U.S. is one of the only countries in the world that taxes its citizens based on citizenship, not residency. This means that as an American living in Italy, even if you're a dual U.S.-Italian citizen earning Italian income, you are obligated to file U.S. taxes and comply with IRS reporting requirements for the remainder of your life.
IRS Reporting Requirements for Americans Living Abroad
Italy and the U.S. have tax treaties in place to prevent double taxation on earned income, as long as your income falls below the Foreign Earned Income Exclusion (FEIE) threshold. As of 2023, the adjusted FEIE threshold for inflation was $120,000 per year. Americans in Italy can also take advantage of the Foreign Tax Credit (FTC) to help reduce U.S. tax liability. However, depending on your work contract and type of income, you can still end up owing money to a country that you no longer live in.
One way that the United States enforces its tax laws abroad is via the Foreign Account Tax Compliance Act (FACTA). FACTA is a federal law that requires U.S. citizens abroad to report their foreign financial accounts and offshore assets. It was signed into law by Obama in 2010 to prevent tax evasion by the top 1%, but the law's success has been dubious, and its drawbacks for average and low-income earners abroad have been immense.
The U.S. is one of the only countries in the world that taxes its citizens based on citizenship, not residency.
Under FACTA, American emigrants and expats must file an annual report of Foreign Bank and Financial Accounts (FBAR) if they have financial assets exceeding $10,000 at any time during the calendar year. This includes bank accounts, investment accounts, pensions, and other foreign financial assets.
Non-compliance can result in severe penalties, and all Italian banks are forced to report your accounts to the IRS each year to avoid financial sanctions.
If you're an American who is planning to live and work in Italy, you'll need to ensure that you file U.S. taxes each year—in addition to your Italian tax return—and that you report all Italian assets to the United States. You'll also need to ensure that you don't earn more than the Foreign Earned Income Exclusion threshold. Otherwise, you will likely owe taxes to the United States, even though you live abroad and do not benefit from U.S. taxation.
Investment Challenges in Italy for U.S. Citizens
U.S. citizens and Green Card holders living in the United States have dozens of smartphone apps, online brokerages, and retirement opportunities available to them when they're ready to start investing.
U.S. citizens and dual citizens living in Europe have no such opportunities—The United States makes sure of it.
The Catch-22 of US and EU Reporting Requirements
Due to recent European Union regulations, all packaged retail and insurance-based investment products (PRIIPs)—such as stocks, mutual funds, and insurances—must provide key information documents (KIDs) to consumers that document their product's investment risks.
Since the U.S. does not comply with these PRIIP laws, many U.S. financial products, including ETFs (exchange-traded funds), are not available to EU residents, including Americans living in Italy.
Unfortunately, U.S. citizens living in Italy also cannot invest in local ETFs or funds due to U.S. laws regarding passive foreign income.
Passive Foreign Income Taxation and Its Consequences
Passive income generally includes dividends, interest, and rent from foreign sources. For Americans in Italy, this income is subject to U.S. taxation.
Due to U.S. tax laws, Americans living in Italy cannot invest in local ETFs, mutual funds, or insurance and retirement programs because the U.S. views these products as Passive Foreign Investment Companies (PFICs). Not only does the IRS require mountains of paperwork to file each PFIC, but they also tax these gains at around 50%, making PFICs extremely tax-inefficient and fiscally dangerous for U.S. citizens to hold.
If you plan to move to Italy, work a normal job, and invest in stocks or retirement funds until you can comfortably retire one day, rest assured that the United States will make this impossible.
How Americans Living in Italy Can Invest Their Money
If Americans in Italy cannot invest in Italian or European stocks and funds, and they also cannot purchase U.S. stocks or funds from Italy, how can they invest their money?
Unfortunately, there are very few options.
- If you are married to a non-U.S. citizen, you can ask your partner to invest money on your behalf.
- If you have close family or friends in the U.S., you can try opening a U.S. brokerage account with a friend's address and phone number, but the brokerage will close your account when they find out that you live abroad.
- If you're wealthy, you can hire an expert in U.S. and Italian taxation to help you invest in hand-picked U.S. stocks and funds that don't trigger PFIC laws. There are always ways to avoid U.S. taxation when you're rich!
- If you're an average dual U.S.-Italian citizen who plans on living and working in Italy long-term, consider renouncing your U.S. citizenship.
Renunciation is the worst-case scenario for those of us with living family in the U.S., but it's currently the only way to live a normal life abroad and free oneself from the unjust burden of U.S. taxation.
Note: It costs thousands of dollars in lawyer and admin fees to renounce U.S. citizenship.
Personally, I plan to renounce my U.S. citizenship in my 30s or sooner, depending on when or if I surpass the Foreign Earned Income Exclusion threshold.
I am an ambitious dual U.S.-Italian citizen, and the concept of limiting my income and living in IRS-induced financial distress for the rest of my life—while also passing on this distress to any future Italian children I have—is unacceptable.
Each year that I am unable able to invest in Italian stocks, bonds, and tax-advantaged retirement accounts is a fiscal year that is wasted trying to please a grotesque Uncle Sam that shouldn't be touching my Italian-earned income in the first place.
The United States was founded on the premise of "no taxation without representation", but it seemed to drop that slogan when it found out that it could bully foreign financial institutions into spying on and fiscally punishing U.S. citizens living abroad.
If you'd like to stay informed on new tax bills and requirements for U.S. citizens living abroad, I recommend subscribing to the American Citizens Abroad advocacy group.
Encouraging the U.S. to adopt residency-based taxation—like every other sane country in the world—will go a long way in halting the financial ruin of everyday Americans, dual citizens, and "accidental Americans" who live abroad.
If you're a U.S. citizen, former citizen, or dual citizen living abroad, I'd love to hear from you! Drop a comment below explaining how you are navigating U.S. reporting requirements and if you're thinking of renouncing your U.S. citizenship.