UPDATED June 13, 2025 with credit given to Caesar Sedek who has written an extremely detailed article on the same topic on his website Caesar the Day.
One of our favorite past-times is to watch YouTube videos on real estate for sale in Italy. We have noticed that there is frequent mention of the “7 Percent Flat Tax” for retirees that are relocating to certain areas in Southern Italy. As part of our “Trying On Italy” experiment, I decided to research what this was all about. I also wanted to estimate how much our taxes would change if we later decided to move to Italy on a more permanent basis.
Would We Pay Taxes on Retirement Income to Italy?
If we live in Italy for more than 183 days in a year, then we would be considered “tax residents.” This means that each year we would have to file and pay an Italian tax return in addition to a U.S. income tax return.
There is a tax treaty between the U.S. and Italy. This treaty specifies which country (Italy or U.S.) can tax specific types of income. Social security income would only be taxed in the U.S. Howeer, income from a retirement plan (ex. 401K, IRA, SEP) distrubtions would only be taxed in Italy.
Other income, such as investment income from non-retirement plan accounts, would be taxed first in Italy and then potentially then the U.S. However, the tax treaty usually prevents double taxation by allowing a “foreign tax credit” for taxes already paid to Italy.
What Are the Italian Tax Rates?
I knew taxes in Italy were higher than in the U.S., but I didn’t really have a full appreciation for how much higher. Italy has a progressive tax rate that starts at 23%. It increases to 35% for annual income over 28,000 Euro, then up to 43% for income over 50,000 Euro. Plus, a regional tax of 1.23% to 3.33% and a municipal tax of 0 to 0.9% is added to this. Capital gains, dividends, and interest income are taxed at a flat 26% rate for investment accounts that are outside of a recognized retirement account (ex. 401K, IRA, SEP).
There is also an IVAFE tax that is applied against the balance of any bank or investment account, regardless of location. Fortunately, it is at a 0.2% rate. Finally, Italy also taxes the value of any real estate that is held anywhere in the world with an IVIE tax of 0.76% on the property value. However, this is rarely applicable to U.S. property because the property tax rate in the U.S. is usually higher than 0.76% and the US-Italy Tax Treaty prevents double taxation.
How Do They Compare to U.S. Tax Rates?
Since Italian tax returns must be filed for each person, regardless of marital status, it would be best to compare with the U.S. tax rates for married filling separately. Last year they started at 10%, then increased to 12% for income over $11,601, then up to 22% for income over $45,151, then 24% for income over $100,526. Capital gains in the U.S. are taxed at 15% for most people. That makes the Italian tax rates are almost twice that of the U.S. tax rates!
To be fair, Italy has an excellent public health system, and health care costs are a fraction of what they are in the U.S. Groceries are relatively inexpensive. Public transportation is amazing. Long term rent, outside of major cities and heavily touristed areas, is very reasonable. Property taxes are a fraction of what they are in the U.S.
Can We Stop Making Medicare Payments?
Another related financial issue is that it is impossible to temporarily stop making Medicare Part B & Part D & Medigap coverage payments for a period of several years without incurring a substantial “late enrollment” financial penalty when they were restarted. If we wanted to keep the door open for returning to the U.S. at some future date, we’d need to keep making Medicare premium payments throughout the years we’d be living in Italy.
Italy’s 7% Flat Tax for Foreign Pensions
I now fully understand why there is so much discussion on Italy’s “7% Flat Tax for Foreign Pensions”, which was introduced in 2019 to revitalize small towns in Southern Italy. The main feature of this plan is a flat tax rate of 7% on all foreign income that would continue for ten years from the date of residency. It also excludes application of the IVAFE and IVIE taxes. It does require moving to a town with less than 20,000 population in Southern Italy or specifc deisgnated areas considered high-risk earthquake zones.
Three Months at a Time for Twice a Year
There is another way it is possible to live in Italy for a substantial amount of time, yet not be subject to becoming a “tax resident”. Italy allows a U.S. citizen to stay in the country for up to 90 days within a 180 day period without a visa. Therefore, it is possible to live in Italy for approximately three months, twice a year.
Living in Italy has always been a dream for us. We are looking forward to our three month experiment of “Trying On Italy”. This experience will help us to weigh out what we will decide to do in the future. Will the allure and magic of Italia outweigh the tax implications? Will we restrict possible locations to move to that would qualify for the 7% flat tax rule? Will we give up on our dream of living in Italy full-time and do the three months twice a year routine? We will see – vedremo!
Wowee….. this type of information, including medicare, is so important for the “trying on.” Thanks for sharing.
Yes … it was an eye opener for me and might end up being a major factor in our decision.
Hubs and I are here under 7%. We live in Polignano a Mare. We are taking the 10 years to get our financial house in order so by then we’re living entirely off invested savings. Savings are not taxed as income. BTW, to qualify you must have a pension of some kind and not have lived in any other Italian location for 5 years. You cannot switch from regular schedule after living in, say, Rome, then moving to a qualifying town later.
My wife and I visited Polignano a Mare a few years ago. What a truly beautiful place. The birthplace of Volare! Thanks for the additional information on the 7% flat tax rule. I actually had been online looking at information today on it. My wife and I should meet the criteria if we decided to go this route so we are currently thinking we will either do a permanent move to a qualifying area or the Schengen shuffle. ; )
Hi amo, we are very interested in Polignano a Mare and will be coming for a visit soon. Would you be willing to email with us about cost of living, apartments, etc.? Mcottini@cox.net
Thanks,
Matt
Hi Matt, I only visited Polignano a Mare for one day, so I don’t have any knowledge of the cost of things like that for that area.
As someone who has explored and studied this topic for a while, I wanted to add a few additional points about the 7%:
Non-Residency Requirement: Applicants must not have been Italian tax residents for at least five tax years prior to opting for the 7% flat tax regime.
Roth IRAs: Withdrawals from Roth IRAs are typically tax-free in the U.S., provided certain conditions are met. However, Italy does not recognize the tax-free status of Roth IRA distributions. Consequently, such withdrawals could be subject to the standard Italian progressive income tax rates, which can be higher than 7%.
The 7% regime applies for ten years, starting with the year in which the transfer of tax residence is effective. Election for the regime is made in the tax return for that year. The regime can be terminated if the taxpayer moves their residence to another municipality that does not qualify for the relief.
A few people have asked me whether they can choose the 7% area for tax purposes, but really live somewhere else because the small towns in the south of Italy may not fit with their lifestyle. Here’s the answer:
Owning a second home in a non-eligible area does not automatically disqualify you from the 7% flat tax regime, provided your primary tax residence remains in the qualifying municipality. However, it’s essential to ensure that your center of vital interests—including personal, social, and economic ties—remains in the qualifying area. If authorities determine that your primary connections have shifted to a non-eligible area, you may risk losing the tax benefits. And they will check periodically through visits from local police.