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I googled this but it seems to be rather complicated. I'm just curious about a friend...she works in Italy as an American.
Now does she pay the Italian income tax on her overall, earned-in-Italy income, THEN pay American income tax based on the remaining income? Or does she pay American taxes on the pre-Italian-taxed income?
The latter. Order of payment doesn't matter. She will pay U.S. income taxes on total worldwide income, including all (pretax) income earned in Italy. I don't know Italy's income tax system for non-citizens.
It's complicated but basically she has an foreign earned income exemption on income earned outside the U.S. up to about $80-85k. If she has a housing subsidy that's actually factored into that, so she'd need to be careful there. Once she crosses that threshold, I believe she pays extra income over that amount. Any taxes she pays in Italy could also be used as a tax credit toward her overall taxable income. Mind you, this is my non-professional understanding of the code, which changes frequently. I'd always get a final opinion from someone who handles foreign income taxes.
Soccerfan,
Every country has a different tax treaty for American workers. Some countries all the
tax is paid to them, the country where the money was earned. Other countries are different.
Depends on the country.
Her employer will let her know what to do. They will be responsible for paying whatever taxes
to whatever government they have to. Accountants also know the answers to her questions.
There are literally so many treaties between countries, it's unbelievable.
In any scenario, for the US, you do not pay taxes twice. It's either you pay the US, or the country
you are making the money in.
Let's say she has to pay the Italian government for the tax there, then she would claim an exemption
amount that would literally lower her taxable income on our F.1040 to zero.
She should get advise from a tax professional as soon as possible or talk to her employer, who
probably understands the tax laws between Italy and the USA. They hired her, they probably
hire many Americans.
It's complicated but basically she has an foreign earned income exemption on income earned outside the U.S. up to about $80-85k. If she has a housing subsidy that's actually factored into that, so she'd need to be careful there. Once she crosses that threshold, I believe she pays extra income over that amount. Any taxes she pays in Italy could also be used as a tax credit toward her overall taxable income. Mind you, this is my non-professional understanding of the code, which changes frequently. I'd always get a final opinion from someone who handles foreign income taxes.
You're basically right. If your earned income from Italy is below the cap, you can write that off with the foreign tax exemption. After that and for other non-US sources of income (i.e., interest income, dividends and capital gains), you pay the Italian taxes on these types of income and then, within each category, use foreign tax credits to reduce your US tax.
What i am not sure about is, if your earned foreign income is above the cap, whether you can use foreign tax credits on the remainder to reduce your US income tax. You certainly can use foreign tax credits on all your earned income for the entire amount, as one alternative.
If you have income from non-earned income sources in the US, you may need to find out if Italy wants to tax these. It all depends on whether Italy taxes your world-wide income or just your Italian source income as a resident of Italy.
Soccerfan,
Every country has a different tax treaty for American workers. Some countries all the
tax is paid to them, the country where the money was earned. Other countries are different.
Depends on the country.
Her employer will let her know what to do. They will be responsible for paying whatever taxes
to whatever government they have to. Accountants also know the answers to her questions.
There are literally so many treaties between countries, it's unbelievable.
In any scenario, for the US, you do not pay taxes twice. It's either you pay the US, or the country
you are making the money in.
Let's say she has to pay the Italian government for the tax there, then she would claim an exemption
amount that would literally lower her taxable income on our F.1040 to zero.
She should get advise from a tax professional as soon as possible or talk to her employer, who
probably understands the tax laws between Italy and the USA. They hired her, they probably
hire many Americans.
I wouldn't be so sure if Italian tax consultants know the US tax code! Where I live, in DK, the advice i received initially that I was bound to follow the double taxation agreement between the US and Denmark was wrong. I only needed to follow it, if after using danish tax credits to offset my danish tax on my world-wide income, I was still being double-taxed. I was not.
Denmark and the US both tax danish permanent residents on their world-wide income. But I still have no need to use the tax treaty to reduce my US tax by taking danish tax credits against my income in all the various categories.
My suggestion is, that if your income tax situation is complicated, to find a good US ex-pat tax consultant who has clients in your country and not rely on local consultants.
Step 1
You pay Italian taxes on the Italian income.
Step 2
Two methods
Method 1 (credit):
You calculate the taxes on all income for the U.S. tax return.
Then after you have that large figure, you subtract the Italian tax paid.
In this case, you only subtract the whole Italian tax paid if it is lower than what you would have paid if the income were in the U.S. Thus, for this case, you end up paying net-net, the tax of whichever country has the higher rate.
Method 2 (exclusion)
You take off the lower of Italian wages or $97,600 (2013 figure) from gross income, then calculate taxes on that income.
Take whichever method is more favorable to you. Higher earners will find Method 1 better.
QUESTION: I was invited to serve as a consultant for a not-for-profit organization in Italy. I am a US citizen. Would the payment that I receive be taxed by the Italian government? In other words, would a percent of my consulting earnings have to go to Italy?
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