U.S.-Italy Estate and Gift Tax Treaty for U.S. Citizens Domiciled in Italy with U.S. Assets

U.S. citizens are subject to U.S. federal estate and gift tax on their worldwide assets. Italy taxes individuals domiciled there on their worldwide assets. This creates a risk of double taxation for U.S. citizens domiciled in Italy with U.S. assets. The 1955 U.S.-Italy Estate and Gift Tax Treaty ("the Treaty") aims to mitigate this.

1. Baseline U.S. Estate and Gift Tax Rules for U.S. Citizens:

  • Worldwide Taxation: Regardless of where they live or are domiciled, U.S. citizens are subject to U.S. federal estate and gift tax on their entire worldwide estate and worldwide gifts. This includes assets in the U.S., assets in Italy, and assets anywhere else in the world.

  • Full Unified Credit/Exemption: U.S. citizens are entitled to the full U.S. federal estate and gift tax unified credit, which effectively exempts a large amount from tax (adjusted annually for inflation, $13.99 million per person as of 2025, but this amount is scheduled to decrease significantly after 2025 unless Congress acts).

  • Filing Threshold: An estate tax return (Form 706) must be filed if the deceased U.S. citizen's worldwide gross estate plus prior taxable gifts exceeds the exemption amount in effect for the year of death. Gift tax returns (Form 709) may be required for gifts exceeding the annual exclusion amount.

2. Baseline Italian Inheritance and Gift Tax Rules (General Overview):

  • Domicile-Based Taxation: As Italy is the country of domicile, Italian inheritance and gift tax rules will generally apply to the worldwide assets of the U.S. citizen residing there.

  • Variable Rates/Exemptions: Italian tax rates and exemptions depend heavily on the relationship between the decedent/donor and the beneficiary/recipient.

3. The Problem: Potential Double Taxation

Given the above, a U.S. citizen domiciled in Italy faces potential double taxation:

  • The U.S. taxes their worldwide assets based on citizenship.

  • Italy taxes their worldwide assets based on domicile.

4. How the U.S.-Italy Estate Tax Treaty Addresses This for U.S. Citizens:

The treaty aims to prevent or alleviate this double taxation, primarily through tax credits. Here's how it works for a U.S. citizen domiciled in Italy:

  • The "Saving Clause": Like most U.S. tax treaties, the U.S.-Italy treaty contains a "saving clause" (Article I(2) implies this, and it's a standard U.S. treaty principle). This clause essentially allows the United States to tax its own citizens as if the treaty did not exist.

    • Impact: This means the U.S. always retains the right to tax its citizens on their worldwide assets using the full U.S. exemption and tax rates, regardless of any treaty rules that might otherwise assign primary taxing rights to Italy based on domicile or asset location. The treaty does not reduce the U.S. tax liability calculated under U.S. domestic law for a U.S. citizen.

  • Primary Benefit - Foreign Tax Credit (FTC): The main way the treaty helps a U.S. citizen domiciled in Italy is by establishing rules to relieve double taxation, primarily requiring the U.S. to grant a credit for Italian taxes paid.

    • U.S. Provides Credit: Because the U.S. taxes based on citizenship (overriding other factors due to the saving clause), the United States generally provides a foreign tax credit against the U.S. estate tax for Italian inheritance taxes paid with respect to property that is subject to tax by both countries.

    • Scope: This credit applies to Italian taxes paid on assets located in Italy, assets located in the U.S. (which Italy may tax based on the decedent's domicile), and assets in third countries, provided they are included in both the U.S. and Italian taxable estates.

    • Limitations: The amount of the U.S. foreign tax credit is limited. It generally cannot exceed the portion of the U.S. estate tax attributable to the doubly taxed property. Calculating this limitation involves specific formulas based on the values of assets taxed by both countries relative to the total U.S. gross estate. (See U.S. Internal Revenue Code Section 2014 and Treaty Article V).

  • Domicile and Situs Rules: While the treaty has rules for determining domicile and assigning primary taxing rights based on asset situs (location), these are less impactful for the U.S. taxation of a U.S. citizen due to the saving clause. However, they remain relevant for determining Italy's taxing rights and confirming which assets are subject to tax in both jurisdictions for credit calculation purposes. For U.S. assets owned by the U.S. citizen domiciled in Italy, both countries have a basis to tax (U.S. based on situs/citizenship, Italy based on domicile), making the credit mechanism essential.

5. Interaction with Italian Wealth Taxes

The Treaty generally does not cover annual Italian wealth taxes like IVAFE (on foreign financial assets) or IMU (on Italian real estate). These are separate and additional taxes.

6. Key Planning Considerations for U.S. Citizens Domiciled in Italy

  • Coordinated Estate Planning: Wills and trusts must consider both U.S. and Italian laws and the Treaty. U.S. trusts, in particular, need careful review for Italian tax implications.

  • Documentation: Maintain meticulous records of asset situs, valuations, and foreign taxes paid.

  • Understand Credits: The interaction of U.S. and Italian taxes and credits is complex.

  • Lifetime Gifting: Consider using annual exclusions, but be aware of the impact on U.S. unified credit and Italian gift tax.

  • Expert Advice: This is a complex area. Consultation with professionals experienced in both U.S. and Italian tax law and the Treaty is essential.

  • Regular Review: Estate plans should be reviewed regularly due to changes in laws, asset values, and personal circumstances.

Summary for a U.S. Citizen Domiciled in Italy with U.S. Assets:

  1. U.S. Tax Liability: You remain subject to U.S. estate and gift tax on your worldwide assets, including those in the U.S. and Italy.

  2. U.S. Exemption: You benefit from the full U.S. unified credit/exemption amount.

  3. Italian Tax Liability: You are likely subject to Italian inheritance/gift tax on your worldwide assets due to your Italian domicile.

  4. Treaty Relief (U.S. Foreign Tax Credit): The primary benefit from the U.S.-Italy treaty is the U.S. foreign tax credit. The U.S. will allow a credit against your U.S. estate tax liability for qualifying inheritance taxes paid to Italy on assets taxed by both countries, subject to limitations.

  5. Gift Tax: Similar principles apply to gift taxes. The U.S. taxes worldwide gifts made by U.S. citizens (above exclusions/exemptions), Italy may tax gifts based on domicile, and the U.S. would typically provide a foreign gift tax credit for Italian gift taxes paid on doubly taxed gifts.

The 1955 U.S.-Italy Estate and Gift Tax Treaty provides a framework to alleviate double taxation for U.S. citizens domiciled in Italy with U.S. assets, primarily through situs rules and foreign tax credits. Due to the U.S. saving clause, the focus is on coordination and credit mechanisms rather than U.S. tax exemption. The Treaty's age and the complexity of cross-border taxation underscore the need for expert guidance.

  • FAQ: Does being a permanent resident (green card holder) rather than a US citizen make any difference for the U.S.-Italy Estate Tax Treaty?

    Yes, being a U.S. permanent resident (Green Card holder) domiciled in Italy with U.S. assets, instead of being a U.S. citizen, makes a very significant difference.

    Here's a breakdown of the key differences compared to the scenario of a U.S. citizen domiciled in Italy:

    1. Basis for U.S. Estate Tax:

      • U.S. Citizen: Taxed based on citizenship, regardless of domicile.  

      • Green Card Holder Domiciled in Italy: Taxed based on domicile. Since they are domiciled in Italy, they are treated as a Non-Resident Alien (NRA) for U.S. estate tax purposes, despite holding a Green Card (which determines residency for income tax).

    2. Scope of U.S. Estate Tax:

      • U.S. Citizen: Subject to U.S. estate tax on their worldwide assets.  

      • Green Card Holder Domiciled in Italy (NRA): Subject to U.S. estate tax only on their U.S. situs assets (e.g., U.S. real estate, U.S. stocks under domestic law unless modified by treaty). Assets located in Italy or third countries are generally outside the U.S. estate tax base.

    3. Applicable U.S. Exemption/Unified Credit:

      • U.S. Citizen: Entitled to the full, large U.S. federal estate tax exemption (unified credit, $13.99 million as of 2025, subject to change).

      • Green Card Holder Domiciled in Italy (NRA): Entitled only to the standard NRA estate tax exemption of $60,000, unless a treaty specifically grants a larger or pro-rata exemption (which the U.S.-Italy treaty does not).

    4. Impact of the Treaty's "Saving Clause":

      • U.S. Citizen: The U.S. retains the right to tax the citizen on worldwide assets as if the treaty didn't exist. The treaty's primary role is providing the U.S. foreign tax credit.

      • Green Card Holder Domiciled in Italy (NRA): The saving clause generally does not apply to NRAs in a way that expands their U.S. tax base beyond U.S. situs assets. The U.S. taxing rights are limited by both domestic NRA rules and the treaty provisions.

    5. Effect of Treaty Situs Rules (e.g., for U.S. Stocks):

      • U.S. Citizen: While the treaty technically gives Italy the primary right to tax U.S. stocks based on domicile, the U.S. saving clause means the U.S. still taxes them. Relief comes via the U.S. foreign tax credit.

      • Green Card Holder Domiciled in Italy (NRA): The treaty rule assigning primary taxing rights for U.S. stocks to the country of domicile (Italy) is generally effective. The U.S. should cede its right to tax these assets, meaning they likely escape U.S. estate tax entirely for the NRA.

    6. Primary Source of Double Tax Relief:

      • U.S. Citizen: Relief primarily comes from the United States providing a foreign tax credit (FTC) for Italian taxes paid.

      • Green Card Holder Domiciled in Italy (NRA): For assets taxed by both countries (like U.S. real estate, which the U.S. taxes based on situs and Italy taxes based on domicile), relief primarily comes from Italy providing a foreign tax credit for the U.S. taxes paid.

    7. U.S. Estate Tax Form:

      • U.S. Citizen: Estate files Form 706 (U.S. Estate Tax Return) if the worldwide estate exceeds the filing threshold.

      • Green Card Holder Domiciled in Italy (NRA): Estate files Form 706-NA (U.S. Estate Tax Return for Nonresident Alien) if the value of U.S. situs assets exceeds $60,000.  

    In Summary:

    The Green Card holder (as an NRA for estate tax) faces U.S. tax only on U.S. assets above a much lower $60,000 threshold, benefits more directly from treaty rules shifting taxing rights away from the U.S. (like for stocks), and relies on Italy (not the U.S.) for primary double tax relief on assets like U.S. real estate. The U.S. citizen faces worldwide U.S. taxation but benefits from the very large U.S. exemption and U.S.-provided foreign tax credits.

Additional Information:

  • Comprehensive analysis of the U.S. - Italy tax treaty

You can download a comprehensive analysis of the U.S.-Italy Estate and Gift Tax Treaty for U.S. Citizens Domiciled in Italy with U.S. Assets here (Spring 2025, 21 pages, PDF format).

Last Modified on May 26, 2025