Immersing in the culture and beauty of Italy as an American expat can be a life-changing adventure. However, Americans moving to Italy face distinctive financial challenges, particularly when it comes to investment decisions. In this article, we outline some essential considerations for American expat investors living in Italy, highlighting the need for expats to adapt not only to a new culture but also to a challenging new financial landscape.
- A complex investment landscape for US expats in Italy
- The impact of tax rules for American investors
- Special expat tax regime in Italy
- Investment and taxation
- Managing currency risk
- Diversification
A complex investment landscape for US expats in Italy
Investment decisions for US citizens and green card holders living in Italy are often more complex compared to those in the United States. One of the primary reasons is that, regardless of their residence abroad, US citizens are subject to both US and Italian reporting and taxation. Consequently, financial accounts and investments in Italy held by Americans must be reported to the IRS, and certain types of Italian investments can lead to US tax liabilities, while real estate in the US will be liable to Italian reporting and wealth tax.
Moreover, American expats in Italy may need help with trying to build diversified portfolios, as they may be limited in investing in US-based funds due to European Union regulations like MIFID II and PRIIPS (Packaged Retail and Insurance-Based Investment Products). These regulations restrict EU residents from investing in non-EU (e.g., US) based funds without specific characteristics. Nevertheless, specialized expat financial advisory firms can provide tailored solutions for constructing investment portfolios that align with each individual’s unique situation, future plans, and objectives.
To further complicate matters, Americans in Italy may not be able to maintain a US brokerage account, as many American brokerage firms aren’t able to work with clients who reside in Italy. Again though, specialist US expat financial advisors can provide solutions.
The impact of tax rules for American investors
While Italy and the United States have signed income tax treaties and Social Security totalization agreements, the worldwide income of American expats is potentially subject to taxation by both the U.S. and Italy. However, there are IRS provisions such as the U.S. Foreign Tax Credit (FTC) that expats can claim that offer a dollar-for-dollar credit on foreign taxes paid. This can significantly reduce the overall tax burden for American expats and help avoid double taxation. Seeking professional guidance from an expat specialist CPA can help you take full advantage of these tax benefits and reduce your worldwide tax obligations.
Special expat tax regime in Italy
Italy offers a special tax regime for expatriates that provides significant benefits for those who transfer their tax residence to Italy, allowing them to just pay income tax on 50% of their income for the first 5 years of residence in Italy, if they have a maximum income of 600,000 euros per year, or 60% if they have dependents. This update aims to attract foreign professionals and high earners to Italy.
Investment and taxation
US tax-advantaged accounts with Italian taxation
The US-Italy tax treaty doesn’t cover tax-advantaged retirement accounts, meaning that Italian doesn’t recognize the tax benefits of accounts such as IRAs, Roth IRAs, or 401(k)s, so seek advice before choosing how to save for your retirement.
Owning foreign mutual funds (PFICs)
American expats in Italy should exercise caution when considering investing in non-US mutual funds, ETFs and private pension plans, which the IRS classifies as Passive Foreign Investment Companies (PFICs). These investments can lead to complex US tax reporting and potentially result in new US tax liabilities. A more tax-efficient approach for American expats is to opt for certain US-domiciled funds and individual stocks through an advisor specializing in expat services.
Managing currency risk
For American expats in Italy, managing different currencies is another important aspect of financial strategy. It’s important to minimize fees associated with currency conversion, whether you’re making investments or drawing on existing investments. Furthermore, the value of investments in other currencies can rise or fall relative to your ‘base currency’ due to exchange rate fluctuations. Again, your expat financial advisor will provide guidance on how to manage these risks. Factors that affect whether you invest in the US or Italy will include how long you plan to live in Italy, where you’ll be living when you wish to draw on your investments, and where your current income is paid.
Diversification
The best investment strategies for American expats in Italy often hinge on factors such as your income and your long-term plans and goals. Nevertheless, the core principle of diversification to mitigate investment risks remains important. How diversification is applied can vary depending on each expat’s particular situation and goals though. For example, it may make sense to invest in both Italy and the US, or it may not, depending on your long term plans and goals. Note also that having assets in Italy as well as the US will have estate planning implications, too.
Final thoughts
While Italy offers an exceptional and fascinating lifestyle for American expats, thorough financial and tax planning is essential when making investments as a US expat in Italy. It’s essential to seek guidance from financial advisors with expertise in international investing to effectively navigate the intricacies or your new financial landscape.
If you have any questions about financial planning as an American living in the EU, get in touch.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
