Is Italy’s Seven Percent Flat Tax Plan Worth Making the Move?

There is much to consider when looking at uprooting and moving to a foreign country by choice. As I have researched earnestly into the implications of making a move to Italy, a dream my wife and I have held since we first fell in love with the country almost 20 years ago, I’ve uncovered some hard realities. Deal killers? Maybe, maybe not – there is a lot to consider, though.

This post has been edited for awareness of some inaccurate statements/assumptions. This is thanks to Caesar Sedek who has written an extremely detailed article on the same topic on his website Caesar the Day. Please also take a look at this article he has written. It goes into much greater depth and research on this topic.

The original article and analysis did incorrectly assume that U.S. Social Security income was subject to taxation by Italy. This is incorrect. U.S Social Security income is only taxed by the U.S. and is not subject to Italy’s progressive tax rates, even when outside of a 7% flat tax area.

Also, investment income was excluded from being applicable to the potential 7% flat tax rate. In this article, it was shown as taxed at the normal Italian investment income tax rate. This is not correct. Investment income is also taxed at the simple and low 7% flat tax rate, if one qualifies.

To incorporate these corrections will require redoing the spreadsheet analysis. This has not yet been done, but I plan to do so as soon as I have time to do this.

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This discussion is mainly from the perspective of a retiree couple from the U.S. that would be moving to Italy. Because the financial consequences vary significantly with income level, I have created three fictional couples, each at different levels of income, for the following analysis. 

Italy has a 7% Flat Tax Regime. It is a tax incentive for retirees who move to certain regions of Italy, almost all exclusively in southern Italy or high-risk earthquake zones . 

The retiree must be a resident in a town with fewer than 20,000 inhabitants. The flat tax plan has a duration of ten years and cannot be renewed.

Like many other countries, if you live in Italy over 183 days in one year, you become a “tax resident” and are subject to Italian tax law. This gives Italy the right to tax you on all income you receive from anywhere in the world. For example, pension or social security payments originating in the U.S are included. Fortunately, there is a tax treaty between Italy and the U.S. that prevents most double taxation. The treaty specifies which country can apply their taxes first for each type of income. Then, the retiree can apply the tax paid as a “foreign tax credit” against any tax liability from the second country.

Essentially, a person is going to be liable for a tax amount that is the highest of the potential tax due, considering what would be the full tax amount of each country. In the case of a retiree moving from the U.S. to a 7% Flat Tax location in Italy, while Italian taxes would be a modest 7%, the retiree would still be liable for the taxes due in the U.S., less the 7% foreign tax credit for payments already made to Italy. This would apply for sources of income that can be taxed by either country. The “foreign tax credit” prevents double taxation.

If a retiree does not move to a 7% Flat Tax location in Italy, their income tax liability would be substantially higher in the U.S. In 2025, Italy has three income tax rates: 

The corresponding 2025 income tax rates in the U.S. for married filing jointly are:

Some general differences between Italy and the U.S. are that there are substantially fewer potential deductions in Italy. In the U.S., there is a standard deduction of $33,000 for a married couple which subsequently makes the taxable income substantially lower. In the U.S., state income tax varies greatly; eight states (ex. Texas) have zero state income tax while California has a progressive state income tax that reaches over 13%. In Italy, the regional tax rate is 1.23 to 3.33% with an additional municipal income tax of 0 to 0.9%. Italy requires each person to file their own individual income tax return. Italy also has a 0.2% IVAFE tax that is applicable to the value of any bank or investment account in the world, but does suspend this tax under the 7% flat tax plan.

I have created a spreadsheet to look at this more analytically for three different couples with different income and savings levels. Italy currently requires each person to have a passive income of at least EUR 31,000 for an Elective Residency Visa (ERV), so I selected a total income of EUR 62,000 for Couple A. Couple B’s income is set to be twice that of Couple B, as well as having $250,000 in savings. Couple C is set to be three times the income of Couple A, with $500,000 in savings.

The spreadsheet calculations were made using the following assumptions:  exchange rate of 1.09 USD per Euro, married filing jointly with the standard deduction for the U.S., currently living in a state that does not have a state income tax, savings generate an annual investment return of 5% for interest, dividends, or short-term capital gains, and a combined Italy regional & municipal income tax rate of 2.7%.

Click to download the spreadsheet for details of the income tax calculations. Note: This spreadsheet incorrectly has assumed U.S. Social Security income is taxed by Italy. This is not correct.

Couple A has an annual total income of EUR 62,000. Their total U.S. income tax would be $3673. Their total Italian income tax would be $16,654. This is 4.2 times higher than the tax amount in the U.S.

If they moved to a 7% flat tax area, then their total tax amount from both counties would be $3673. They would need to set aside EUR 334 for income tax each month from their total monthly income of EUR 5167.

If they moved to Italy but in an area that did not qualify for the 7% flat tax plan, their total tax amount from both countries would be $16,654. They would need to set aside EUR 1388 for income tax each month from their total monthly income of EUR 5176.

Over a period of ten years, the tax savings for Couple A would be approximately EUR 129,814.

Couple B has an annual total income of EUR 124,000. Their total U.S. income tax would be $15,301. Their total Italian income tax would be $45,698. This is 3 times higher than the tax amount in the U.S.

If they moved to a 7% flat tax area, then their total tax amount from both counties would be $15,301. They would need to set aside EUR 1390 for income tax each month from their total monthly income of EUR 11,375.

If they moved to Italy but in an area that did not qualify for the 7% flat tax plan, their total tax amount from both countries would be $45,698. They would need to set aside EUR 3808 for income tax each month from their total monthly income of EUR 11,375.

Over a period of ten years, the tax savings for Couple B would be approximately EUR 303,973!

Couple C has an annual total income of EUR 186,000. Their total U.S. income tax would be $33,166. Their total Italian income tax would be $77,782. This is 2.3 times higher than the tax amount in the U.S.

If they moved to a 7% flat tax area, then their total tax amount from both counties would be $33,166. They would need to set aside EUR 3013 for income tax each month from their total monthly income of EUR 17,583.

If they moved to Italy but in an area that did not qualify for the 7% flat tax plan, their total tax amount from both countries would be $77,782. They would need to set aside EUR 6,482 for income tax each month from their total monthly income of EUR 17,583.

Over a period of ten years, the tax savings for Couple C would be approximately EUR 446,162!!

If a retiree moves to Italy under the ERV to an area that does not fall under the 7% flat tax plan, they will become an Italian tax resident after 183 days. Their annual income tax liability will increase approximately 2 to 4 times the tax amount they would have been paying in the U.S.

While the 7% flat tax is limited to ten years, the tax savings over this 10-year period are substantial. The amount saved for a couple with the minimal passive income amount required for an ERV would be EUR 129,814. For the couple with three times the minimum passive income amount, they would save EUR 446,162!! This is a substantial amount that would be roughly equivalent to the cost of a very nice home in Italy.

In discussions of the tax rates of Italy versus the U.S., there is often mention made of some offsetting factors. Common topics are property taxes and medical expense. 

Property tax rates in the U.S. vary by location. States with no state income tax typically have a higher property tax rate. For this analysis, I will use the average Texas property tax rate of 1.8%. If a couple owned a $300,000 home, the annual property tax would be $5,100. For a $600,00 home, the annual property tax would be $10,200.

In Italy, the IMU property tax (0.5 to 1.06%) only applies to second homes and luxury residences. So, for the retiree that relocated to Italy, this tax would likely not apply.

It is true that an retiree would likely save roughly between $5000 to $10,000 for not having to pay property taxes in Italy.  Does this offset the higher Italian income tax rate? For a couple with a lower income, perhaps somewhat. For a couple with higher income levels, not really.

For Couple A, their income tax would increase from $3,673 in the U.S. to $16,654 in Italy. Depending upon the value of their home and the property tax rate they had in the U.S., the  property taxes savings of $5 – $10K would be about half of the additional tax due. 

For Couple B, their income tax would increase from $15,301 in the U.S. to $45,698 in Italy. Depending upon the value of their home and the property tax rate they had in the U.S., the property tax savings of $5 – $10K would only offset about one-half of the additional tax due.

For Couple C, their income tax would increase from $33,166 in the U.S. to $77,782 in Italy. Depending upon the value of their home and the property tax rate they had in the U.S., the property tax savings of $5 – $10K would offset only a small fraction of the additional tax due.

In summary, the savings from not paying property tax would help offset some of the additional tax burden from the higher Italian income tax rates. However, for most people, this offset would only compensate for a fraction of the additional tax burden.

For the typical retiree in the U.S., Medicare would be applicable. Medicare costs approximately $7,300 a year for a couple that pays for Part B without IRMAA surcharges, a zero cost Part D, and a Medigap G policy. Each person is liable for $257 Part B deductible and a max out of pocket drug expense of $2000 (new 2025 law). 

For the retiree in Italy, usually within their first year of arrival, they can join the National Health Service SSN plan that would provide for public care with minimal co-payments for drugs and services. For non-citizens, this requires a payment of EUR 2000 per person. So, the total expenses for a couple in Italy would be approx. EUR 4000.

When comparing the cost savings for medical expenses in Italy versus the U.S., it is only approximately EUR 2700 per year. This assumes that the retiree would not be obtaining medical care outside of the Italian public health system. So, it is true that medical care in Italy is less expensive than in the U.S., but this difference in cost is only a fraction of the additional tax burden amount.

Click to download the spreadsheet for details of the medical expense calculations.

Groceries are less expensive in Italy, at approximately two-thirds of the cost they would be in the U.S. 

While Italy has excellent public transportation, the cost of energy is substantially higher. A liter of gasoline or a kilowatt-hour of electricity is approximately twice as expensive in Italy as in the U.S. Natural gas is slightly more than twice as expensive. This results in substantially higher utility costs unless lifestyle adjustments are made regarding consumption.

In the U.S., the average state and local sales tax is 7.7%. In Italy, the VAT is 22%. In both countries, this tax is reduced or doesn’t apply for certain categories of items or services.

A retiree moving from the U.S. to Italy will need to plan for and accept that there will be a sizeable increase in their income tax liability. Also, expenses for the higher cost of energy and consumption taxes (VAT) will need to be planned for and budgeted. It is true that a portion of these additional expenses will be partially offset by lower cost of medical care and no property tax for full-time residents. 

The Italian 7% tax plan essentially defers the significant increase in income tax liability for ten years. One must be willing to move to a location that qualifies, remain there for ten years, then accept the fact that the tax benefits will cease to apply after ten years. However, the potential tax savings over a ten-year period are substantial. This is especially true for retirees with a higher income level.

As Paula and I continue with “Trying On Italy”, will this information affect our decision to move to Italy? I can say that it has been eye-opening and has given us a bit of pause. It makes us reconsider living there part-time on the Schengen Shuffle approach. If we did decide to move to Italy full-time, we would likely only consider locations that would qualify for the 7% flat tax plan.

I am not an accountant or contabile. I am not an attorney or avvocato. This spreadsheet analysis uses many assumptions as the potential variables are infinite. My information, assumptions,  and calculations could be in error.

My intention is to try to make some generalized assumptions to calculate approximate amounts that would allow a U.S. retiree to be aware of the financial pros and cons of retiring in Italy. Also, to be able to weigh the value of the 7% flat tax plan that Italy offers for making the decision to relocate in a 7% flat tax plan location.