What Americans Need To Know Financially Before Moving To Italy

For U.S. citizens living abroad, investing and saving for retirement is no simple feat.

What Americans Need To Know Financially Before Moving To Italy
Arco della Pace in Milan, Italy.

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Moving to Italy 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. Unfortunately, it feels like 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 (FATCA). FATCA 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 FATCA, 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.

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 far fewer opportunities.

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 U.S. citizens and dual citizens 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 U.S. citizens 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 certain 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.

How Americans Living in Italy Can Invest Their Money

If U.S. citizens and dual citizens 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?

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. Most people I've spoken to end up doing this. However, it's worth noting that the brokerage might close your account if 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 stocks or funds that don't trigger PFIC laws. There are always ways to avoid U.S. taxation when you're rich!
  • If you never plan on returning to the United States, you can recounce your U.S. citizenship. This is particularly useful for those who don't want to burden their future children with U.S. tax laws.
    Note: It costs quite a bit of money in lawyer fees to renounce U.S. citizenship.

As an ambitious dual U.S.-Italian citizen, the concept of limiting my income or 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. I hope to see these laws modified or removed within my lifetime, and I encourage everyone to continue raising awareness about the injustice of citizenship-based taxation.

If you'd like to stay informed about 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 preventing the financial ruin of U.S. citizens, dual citizens, and "accidental Americans" who live abroad.