If you’re on an Italian payroll, IRPEF plus the regional and municipal surcharges usually come to more than the US would charge on the same pay, and the foreign tax credit wipes out the US bill. The surprises come from Italy’s own incentives. The impatriate regime, the new-resident flat tax and the 7% regime for pensioners all cut your Italian tax, and the IRS doesn’t follow along.
Below is how the two systems fit, starting with when Italy counts you as resident.
When does Italy treat me as a tax resident?
Since 2024 the test in article 2 of the TUIR has been rewritten. You’re resident in Italy for the whole year if, for most of it (183 days, or 184 in a leap year), any one of these applies: you have your residence there in the civil-law sense, your domicile is there, you’re physically in Italy, or you’re registered in the anagrafe, the municipal population register. Domicile now means the place where your personal and family relationships mainly are, so a spouse and children living in Florence point to Italy even if your contract is somewhere else. Part-days count toward physical presence.
Anagrafe registration used to be close to conclusive. It’s now a presumption you can rebut with evidence. Italy has no split year, so someone who arrives in May and stays is usually resident for the whole calendar year.
None of this changes your US position. The treaty’s saving clause (Article 1(2)) lets the US tax its citizens as if the treaty didn’t exist, apart from a short list of exceptions. You file a 1040 every year as well as your Italian return.
When are the Italian and US returns due for 2025?
Both countries tax the calendar year. Italian employees normally file the Modello 730, which settles any balance through your payslip. Self-employed people, and anyone the 730 doesn’t fit, file Redditi PF. The 730 now has a section for foreign assets, so plenty of expats who used to need Redditi PF can use it.
- 1
15 April 2026 · US tax payment due
Filing can wait, but interest on any unpaid US tax runs from today.
- 2
15 June 2026 · US return, automatic for Americans abroad
Attach a statement that you lived outside the US on 15 April.
- 3
30 June 2026 · Italian balance and first advance
The saldo IRPEF for 2025 and the first acconto for 2026, if you file Redditi PF or owe outside payroll.
- 4
30 September 2026 · Modello 730
Through a CAF, your employer or the precompilata online.
- 5
15 October 2026 · US return with Form 4868, and the FBAR
File Form 4868 by 15 June. The FBAR extends to 15 October automatically.
- 6
2 November 2026 · Redditi PF
The legal date is 31 October, which falls on a Saturday this year.
For anything beyond a simple salary we usually extend the 1040 to October, so the Italian figures are final when we credit them. Convert salary, interest and tax paid through the year at the IRS 2025 average rate, €0.886 per $1. A sale of shares, property or a fund uses the rate on the day.
Foreign tax credit or the exclusion for an Italian salary?
For most employees our default is the foreign tax credit (Form 1116). IRPEF on 2025 income is 23% up to €28,000, 35% up to €50,000 and 43% above. On top come the addizionale regionale, between 1.23% and 3.33% depending on the region and your income, and the addizionale comunale, up to 0.8% (Rome can go to 0.9%). All three are income taxes and all three are creditable. By the time you’re earning €50,000 or so, the Italian total is ahead of the US tax on the same pay, and the extra credit carries forward ten years.
The credit route also keeps you able to put money into an IRA or Roth IRA, which excluded income can’t fund. Your INPS contributions are a different matter. Under the totalization agreement they aren’t creditable, so they stay out of the calculation.
The foreign earned income exclusion shelters up to $130,000 of 2025 earnings, and the housing exclusion can add more if you pay rent. Notice 2025-16 sets the 2025 housing cap at $65,300 for Milan and $43,700 for Rome (Naples, Genoa and La Spezia have their own figures; everywhere else uses $39,000), less the $20,800 base. That combination wins when your Italian tax is unusually low, which in practice means the impatriate regime.
Does the impatriate regime change the US math?
Yes, and it’s the most common reason we switch someone from the credit to the exclusion. Under the regime as reformed for 2024 arrivals, a highly qualified worker who wasn’t Italian resident for the previous three years (six or seven if you’re staying with the same employer group) pays IRPEF on only half of their employment or professional income, up to €600,000 a year. With a minor child it’s 40%. It runs for the year you arrive and the next four, and you must stay resident for at least four years or repay the benefit with interest.
Halving the Italian tax base roughly halves the Italian tax, and suddenly the credit no longer covers the US bill.
Take Mark, a single engineer who moved to Milan on the impatriate regime
Mark earns €120,000, about $135,440 at the 2025 rate. After INPS contributions of roughly €11,000, half of the rest is taxable in Italy, around €54,500. IRPEF on that is about €16,000, and the Lombardy and Milan surcharges take the total to roughly €17,300 ($19,500).
With the credit, US tax on $135,440 less the $15,750 standard deduction is about $21,570. The Italian credit covers $19,500 of it, leaving roughly $2,000 to pay every year of the regime.
With the exclusion, $130,000 comes off his income. The remaining $5,440 is less than the standard deduction, so his US tax is zero. If he rents in Milan, the housing exclusion has room to spare.
These are rounded figures. Revoking the exclusion later locks you out of it for five years, so we plan for the year the regime ends before electing it.
Do the flat tax for new residents and the 7% pension regime help an American?
Mostly not on the US side. The flat tax for new residents replaces Italian tax on your foreign income with a fixed annual sum: €100,000 for those who opted in before 10 August 2024, €200,000 after that, and €300,000 (plus €50,000 per family member) for people moving from 1 January 2026. It settles Italy and nothing else. The US still taxes your worldwide income, and because it’s a lump sum that doesn’t depend on what you earn, we don’t treat it as a creditable income tax. For a US citizen it only makes sense when ordinary Italian tax on your foreign income would be higher still.
The 7% regime lets retirees moving to small towns in the south (Sicily, Calabria, Sardinia, Campania, Basilicata, Abruzzo, Molise and Puglia) pay 7% on foreign income for ten years. It makes Italy cheap, but your US tax on IRA withdrawals and pensions stays close to what it would be in the US, less a credit for that 7%. Choose the town for the life, not the US saving.
What goes in the quadro RW, and which Italian accounts cause trouble?
Italian residents list foreign assets in the quadro RW, and your US accounts are foreign assets now. Your Schwab account and your house in Ohio both go on it. Two wealth taxes are calculated there: IVAFE, 0.2% a year on foreign financial assets (a flat €34.20 on a current or savings account with an average balance over €5,000), and IVIE, 1.06% on foreign property. Neither is an income tax, so neither is creditable in the US.
Going the other way, the IRS cares about what you hold in Italy:
| Italian holding | In Italy | On your US return |
|---|---|---|
| Conto corrente, conto deposito | Interest taxed at 26%; €34.20 bollo above €5,000 | Interest taxable, Italian tax creditable; counts for FBAR |
| BTP and other Italian government bonds | Interest taxed at 12.5% | Plain bonds, not PFICs; Italian tax creditable |
| Fondi comuni, SICAV, European ETFs | 26% on gains and income when realised | Usually PFICs: Form 8621 each, punitive tax without an election |
| TFR held by your employer | Taxed separately when paid out | Taxable when paid, as wages for past work |
| Fondo pensione | Contributions deductible, favourable tax on payout | Unsettled; see below |
A PFIC (passive foreign investment company) is the US label for almost any non-US pooled fund. Without an election, a sale or large distribution is spread back over the years you held the fund, taxed at the top rate for each year and charged interest. For listed ETFs we usually make a mark-to-market election, which taxes each year’s rise as ordinary income. Italy taxes funds only when you sell, so in the meantime there’s no Italian tax to set against that US tax.
Say you live in Bologna with a US brokerage account and a fund from your Italian bank
Your Fidelity account is worth about $150,000, roughly €132,900. Italy charges IVAFE at 0.2%, about €266 ($300) a year, through the quadro RW. The US gives no credit for it.
Your bank also put €40,000 into an Italian equity fund, which rose €3,000 (about $3,390) in 2025. You sold nothing, so Italy taxes nothing. Under mark-to-market the US taxes the $3,390 as ordinary income, about $745 at a 22% bracket, and the spare credit from your salary can’t absorb it because this is passive income. You also file Form 8621 and an FBAR.
Selling the bank fund and buying the same exposure in the US account ends the PFIC problem. The IVAFE stays.
Are TFR and Italian pension funds a problem on a US return?
The TFR (trattamento di fine rapporto) is the severance your employer sets aside, roughly one month’s pay for each year worked, and pays when you leave. While your employer holds it, it’s an unfunded promise, and the US taxes it when you receive it, as wages for earlier work. Italy taxes it separately at a rate based on your average income, and that tax is creditable. The exclusion rarely helps, because it only covers pay received by the end of the year after the work was done.
A fondo pensione is where the law is unsettled, and it’s where many people’s TFR ends up, since employees can direct it there. The treaty protocol names fondi pensione as Italy’s pension plans, but only for a narrow rule about cross-border contributions, and it doesn’t make the fund tax-deferred for a US citizen living in Italy. Some practitioners treat a fondo pensione as a foreign employees’ trust taxed mainly on payout; others look through to the investment funds inside it as PFICs. Our lean: for an occupational fund your employer pays into, we report the employer contributions as wages and defer the growth, disclosing the position; for an individual plan you picked yourself, we’re more cautious. Whichever way, the treatment has to stay the same year to year.
Before you sign anything at the bank
Tell your bank and your commercialista you’re American. A current account, BTPs and shares held directly are simple on a US return. Bank-sold funds, unit-linked policies and an individual pension plan cost real money and paperwork every year.
How are INPS, US Social Security and pensions taxed?
The US–Italy totalization agreement keeps you in one social security system at a time. Employees of Italian companies and self-employed people living in Italy pay INPS; a US employer sending you over for up to five years can usually keep you in US Social Security with a certificate of coverage. If you’re self-employed in Italy, attach the Italian certificate to your 1040 so the IRS doesn’t bill self-employment tax.
On payouts, the treaty matters most for dual citizens. Article 18(2) makes US Social Security taxable only in your country of residence, and the Protocol keeps that rule for residents who are nationals of that country, so a dual US–Italian citizen living in Italy pays tax on it only to Italy. If you’re American only, Italy taxes it and the US taxes it too, with a credit for the Italian tax. Your INPS pension is taxed by the US with a credit for Italian tax. IRA and 401(k) withdrawals are taxed by Italy as your country of residence and by the US as usual, and the treaty lets the US credit the Italian tax.
What about the FBAR and Form 8938?
If your non-US accounts together topped $10,000 at any point in 2025, you file an FBAR listing every one, including a conto deposito and any fondo pensione with a cash value. Form 8938 applies on top once foreign financial assets pass $200,000 at year-end or $300,000 at any time ($400,000 or $600,000 married filing jointly). Italian banks report American clients under FATCA, so a missing year is easy for the IRS to find. If you’re behind, the Streamlined procedure (three years of returns, six of FBARs) usually shows little or no tax for someone earning in Italy.
Married to an Italian?
You normally file married filing separately, where the $5 threshold applies, unless you elect to treat your spouse as a US resident and file jointly. That pulls their worldwide income and their Italian funds into the US system, so we run both versions before recommending it.
What we’d do for you
We’d start with your 730 or Redditi PF and your CU (the certificazione unica from your employer), credit IRPEF and the surcharges, and check whether the impatriate regime makes the exclusion the better choice this year. Then we go through your Italian accounts one by one, since the funds and pension plan are where the US bill usually comes from. If you left a US state recently, our state tax guide covers whether it still treats you as a resident, and the US expat tax guide has the rules that apply everywhere.