Tax Implications for U.S. Citizens Living Abroad in Italy

Relocating to Italy is a dream for many Americans. Between the art, food, landscapes, and lifestyle, it’s easy to see why so many retirees and remote professionals are packing their bags. But along with the beauty of Italy comes a serious practical question: what happens to your U.S. retirement accounts and investments once you become an Italian tax resident?

The answer isn’t simple. Italy taxes residents on worldwide income, which means that your 401(k), IRA, Roth IRA, and even taxable brokerage accounts may all come under the Italian tax lens. Below, we’ll walk through the basics of Italian tax residency, how different U.S. accounts and investments are treated, and what key differences you should be aware of when comparing the Italian and U.S. systems.

Becoming an Italian Tax Resident: The Basics

Italy generally considers you a tax resident if you spend more than 183 days in the country, register your residence, or establish your “center of vital interests” there. Once resident, you are taxed on your worldwide income – not just income generated in Italy.

This means U.S. retirement distributions, dividends, interest, and capital gains all need to be reported in Italy. You may also have to disclose your foreign accounts and assets in your annual Italian tax return (through a section called Quadro RW).

Fortunately, the U.S. and Italy have a tax treaty designed to prevent double taxation. Still, how that treaty applies in practice depends on the type of income and the timing of withdrawals or gains.

U.S. Retirement Accounts in Italy

Traditional IRAs, 401(k)s, and Similar Accounts

Withdrawals from tax-deferred accounts such as traditional IRAs and 401(k)s are generally treated as ordinary income in Italy. Unlike in the U.S., there’s no preferential treatment for the fact that these funds were set aside pre-tax. When distributions are taken, they are added to your other income and taxed at Italy’s progressive rates.

The treaty between the U.S. and Italy can help limit double taxation, but you may still find that Italy’s rates push your overall tax liability higher than what you would have owed in the U.S.

Roth IRAs and Roth 401(k)s

This is where surprises often arise. In the U.S., Roth accounts enjoy tax-free qualified withdrawals. Italy, however, does not typically recognize this special status. As a result, Roth distributions may be taxed in full as income in Italy, negating the advantage you enjoyed stateside.

Social Security and Pensions

Generally speaking, your Social Security will be fully taxable in Italy as ordinary income. The same is true for ordinary pensions. A noticeable exception though derives from pensions deriving from the work performed under a public entity, such as a federal department or a local municipality. Said pensions will be taxed in the U.S. alone.

Key Takeaways for Retirement Accounts

• Distributions are usually taxable in Italy, regardless of U.S. deferral or exemption.
• Roths are not recognized as tax-free by Italian authorities.
• Timing matters: withdrawing before establishing Italian residency can sometimes reduce your exposure.
• The U.S.–Italy treaty can reduce or offset double taxation, but it does not eliminate Italian tax obligations.

Non-Retirement Investments

Moving beyond retirement accounts, Italy also taxes dividends, interest, and capital gains from U.S. investments.

Dividends and interest: Generally subject to a flat 26% tax in Italy. Certain government bonds qualify for a lower 12.5% rate.
Capital gains: Gains from the sale of stocks and mutual funds are also taxed at 26%. There’s no “long-term” discount like in the U.S. Income deriving from American ETFs will instead be taxed as regular income.
Foreign real estate: If you own property in the U.S., Italy can tax the rental income and gains on sale. You may also owe a small annual tax (IVIE) on the property’s value, though the property tax paid in the US generally offsets what is due in Italy.
Foreign financial assets: Brokerage accounts, funds, and other investments held abroad may be subject to an annual 0.2% tax (IVAFE). Thankfully, the ownership of IRAs and 401(k)s is not subject to IVAFE, but it still needs to be disclosed.

These taxes apply in addition to any U.S. withholding or taxes you pay, though you can usually claim credits to avoid being fully taxed twice.

Comparing the U.S. and Italian Systems

Case Study: John Moves to Florence

Let’s look at an example.

John, age 68, decides to retire in Florence. His financial picture includes:
– $600,000 in a traditional 401(k)
– $200,000 in a Roth IRA
– $30,000 coming from Social Security annually
– $30,000 coming from a VA pension annually
– $150,000 in a U.S. brokerage account invested in stocks and ETFs
– A rental property in Florida worth $300,000

Here’s what happens once John becomes an Italian tax resident:

401(k) distributions: Withdrawals are taxed in Italy as regular income. If John takes $30,000, it’s added to his Italian taxable income for the year and taxed at progressive rates. He may be able to credit U.S. withholding, but the Italian rates could be higher than what he paid before.

Roth IRA: Although tax-free in the U.S., withdrawals are not recognized as exempt in Italy. A $10,000 withdrawal could be taxed in full as income.

Social Security: Italy will tax the income as regular income.

VA pension: pension income resulting from work performed under a foreign public entity is not taxed in Italy.

Brokerage account: Dividends and capital gains are taxed at 26%. If John sells $20,000 of stock with a $5,000 gain, Italy taxes the gain at the flat rate, regardless of how long he held the stock. American ETFs are not considered as stocks under EU law; income deriving from them will be taxed as regular income at progressive rates.

Rental property: Rental income from Florida is taxed in both the U.S. and Italy. John pays U.S. tax first, then reports it in Italy – where it may be taxed again, with credits on US taxes available to prevent full double taxation. He may also owe IVIE tax on the property’s value, but the higher US taxation is likely to offset IVIE, resulting in no additional charges.

Wealth tax: On top of income tax, John pays 0.2% annually on the value of his U.S. brokerage account under IVAFE. While he has to disclose the amounts held in 401(k) and IRA accounts, these generally do no produce additional tax liabilities.

Lesson from John’s case: While the tax treaty between Italy and the U.S. provides some relief, Italy’s system generally leads to higher overall taxation on investment income. In particular, it eliminates the Roth IRA advantage that many Americans count on during retirement.

Practical Tips Before You Move

• Plan withdrawals strategically. Consider whether it makes sense to take certain distributions before establishing Italian residency.
• Review your Roth accounts. What is tax-free in the U.S. may not be in Italy.
• Understand annual reporting. Be prepared to declare foreign assets, even if they don’t generate income.
• Explore special regimes. Italy offers favorable tax programs, such as a 7% flat tax on foreign income for qualifying retirees, and a flat €200,000 annual tax option for high-net-worth individuals with significant foreign income.
• To ensure you’re saving money in both Italy and the U.S., it’s a smart idea to hire an Italian commercialista (CPA) who understands international tax treaties and can also communicate well in English. A professional like this can coordinate directly with your American accountant, making sure both sides are aligned. This teamwork helps you take full advantage of the tax treaty between the two countries, while also protecting you from the risks of being taxed twice on the same income.