Taxes vs. penalties
By Don Carroll
he new U.S. Tax Cuts and Jobs Act that went into effect on Dec. 22, 2017 won't have much of an effect on U.S. citizens who reside in Italy and pay income taxes here. That's what I recently told Martin, an American tax client and long-term resident of Italy. Instead, I went on, what he and all U.S. expatriates need to be absolutely certain of is that they've declared all the accounts they hold in financial institutions outside Italy on their Italian returns.
Martin recently received a letter from one of the U.S. institutions where he has an investment account. The bank requested that he complete and return a self-certification form to declare his citizenship and country of tax residency, if other than the U.S. The form also required that he provide his tax code in the country of tax residency as well as his consent to share that information with local tax authorities. The request is the result of compliance with exchange of information agreements entered into by the U.S., Italy and other countries.
Semi-retired, Martin was once a very successful CEO and still sits on several boards of companies that have headquarters in Belgium and Denmark. Though savvy in his work, he's nonchalant about his personal taxes and tends to follow what his heart tells him is "fair and just" when declaring his income and their sources. Unfortunately, it's a strategy that leaves him battered and bruised every time. Yet he persists "on principle."
I ran down the not-always-simple situation for him (and you might consider asking for the same from your own lawyer or accountant).
Seen from the U.S. vantage point alone, the new bill could have consequences on certain individuals. There are new income tax brackets and rates, which beginning in 2018 may reduce Martin's tax load. The moving expense deduction has also been removed. Some itemized deductions have been capped ($10,000 total in real estate, sales, state and local taxes), limited (mortgage interest up to $750,000 in mortgage debt), or eliminated (unreimbursed employee expenses and tax preparation, safety deposit box and investor advisory fees).
The personal exemption has been eliminated and the standard deduction has been doubled. The child tax credit has been increased. Beginning in 2019, alimony will no longer be deductible by the paying spouse.
Up and down, up and down — will any of this really matter to him? Maybe. To what degree — again, based on the calculation of U.S. taxes only — will naturally depend on individual circumstances. I told Martin we could do an estimate of how his 2018 U.S. taxes would look based on the new law.
Bottom line, U.S. expatriates examining the new law must still take into consideration what has not changed. The foreign earned income exclusion, net investment income and alternative minimum taxes remain intact. So do Italian income taxes. Therein, of course, lies the rub.
Italian taxes do not take into consideration the deductions the U.S. may confer. Deductions under the Italian system are lower and the tax on earned income is higher. For many who work, this means that by combining the foreign earned income exclusion in the U.S. and paying taxes to Italy on the balance, no income taxes remain due the U.S.
But remember this: the Net Investment Income Tax and the Alternative Minimum Tax are still taxes, not penalties assessed against capital. They have to be paid.
Italy has required its tax residents, including U.S. expatriates, to report investments and real estate held outside of Italy since 1991. Failing to do so risks fines of up to 30 percent of the amount of their value not reported. Being cavalier about these demands, and the penalties for failing to comply with them, is most definitely the wrong approach.
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