User case: US citizens living in Malaysia, where neither worldwide income nor assets are taxed, considering moving to Italy where worldwide income and assets are taxed.
PROJECTED 2015 INCOME ( all originates in the US)
INCOME SOURCE | $ USD | EUROS € |
Interest | $4,000 | 3,600 € |
Qualified Dividends | $6,000 | 5,400 € |
Rents (net expenses) | $20,000* | 18,000 € |
LTCGs | $30,000 | 27,000 € |
401k to Roth IRA Optional | $40,000 | 36,000 € |
Total Income | $100,000 | 90,000 € |
*Passive Income = NET Income from CA house (gross rents - interest, repairs, maintenance, property taxes) + Net Loss from apartments (gross rents - management fees, op expenses, property taxes, utilities, repairs, etc.). In the US, we cannot net gains and losses across properties unless we plan to link them when divesting. So while one operates at a paper loss, mounting up passive loss carryovers in the $80k range, the other chugs along with income. This passive income shit sucks. And no, I'm not an 'active participant' in operations on the loss property.
Before we get down to calculating, here are the relevant tax credits, deductions, you know, the free money part:
2015 DEDUCTIONS, EXEMPTIONS | US | Italy |
Std Deduction | $12,600 | 0 €
|
Pers/Dep Exemptions | 5x$4k=$20,000 | Me,DH=9,600€, 3kidsx690=2,070€
|
Total Deductions: | US:$32,600 | IT:11,670 € |
2015 CREDITS Even more free money - yeah! | USA! USA! | Italy |
Education Tax Credit | DD = $2500 | 0 |
Child Credit | DS = $1000 | 0 |
TOTAL CREDITS | US:$3,500 | IT:0 € |
US Tax calculation:
$100,000
- $32,600 in deductions and exemptions
= $67,400
AGI taxable income
This is less than $74,900, so within the 15% tax bracket. That means LTCGs and QDs are taxed at 0%. So, subtracting them out:
$67,400
-$36,000 = $31,400 AGI taxed at 15%, (corrected: first $18,450 taxed at 10%)10% for the first $18,450 and 15% on the rest
$18,450@10% = $1845
+ $31,400 12,950*.15 = $1942 = $3788 tax liability before credits. Credits are $3500, so,
$3788
- $3,500 =$1,210 $288 (credit to MDM catching math error ) US Tax liability in 2015. Italy Tax calculation:90,000€
- 11,670€ deductions & exemptions
= 78,330€ AGI
Half of LTCGs and QDs are not taxed, so 36,000/2 = 18,000 :
78,330€
-18,000€ ( 1/2 of LTCT + QD total)
= 60,330€ AGI
Now, interest is taxed at a flat 26%. I'm not sure if this amount counts as filling up the the tax bracket or not. I'll go ahead and count it as if it does. In meantime, interest of 3600€ taxed at 26% = a €936 tax liability.
First 3,600 (interest) taxed at 26% = € 936 tax liability.
Next 26,400 taxed at 23% = € 6,072
Next 16,000 taxed at 27% =€ 4,320
Next 14,330 taxed at 38% =€ 5,445
Total IT IPREF Tax Liability: €16,773
But that's not all. There's a wealth tax. I'm going to assume that the property taxes we pay in the US offset the .76% annual tax on overseas real estate holdings, per the double taxation tax treaty between both contracting countries. If it didn't, this tax liability would be approximately €6,500. The other wealth tax is for out of country financial assets. I have found nothing that says our 401ks are exempt from this tax. Therefore, the tax on the total value of all non-real estate financial assets would be approximately €1500.
€16,773
+1,500 wealth tax on overseas financial assets
-€1,090 200 credit for tax payment to US
€18,072 IT Tax Liability in 2015. Uh, er, uh, that's $20,000. Italy Tax Table For your reference: (Note: so far as I can tell, DH and I technically file separately, even if we sign our names to a common return. This has the effect of doubling the ranges of the tax tables in what would be an effective joint return. I could be wrong, but that's how I read it so far).
ANNUAL INCOME ABOVE | ANNUAL INCOME BELOW | TAX RATE |
0 € | 15000 € / MFJ: 30,000 € | 23% |
15000€ / MFJ: 30,000 € | 28000 € / MFJ: 56,000 € | 27% |
28000€ / MFJ: 56,000 € | 55000€ / MFJ: 110,000 € | 38% |
55000€ / MFJ: 110,000 € | 75000€ / MFJ: 56,000 € | 41% |
75000€ / MFJ: 150,000 € | - | 43% |
So what if, in 2016 we opted to do no 401k conversions? Ugh, then we lose that sweet 15% tax treatment of the conversions. Also we're giving up the ability to take LTCGs and QDs at 0% as they'd be taxed in Italy even if not in the US. I don't even care to compute the alternative case at this point. I'm so... despondent.
Sigh, I love Italy, but Malaysia's looking much much better, at least as far as taxes go. After my first pass analysis... who am I kidding here? Let's start that sentence again: After my ninth-ish pass analysis, I wrote Italy a cheesy Dear John letter the other day, announcing our imminent breakup (url removed - the wound is still raw - too soon - (
does Scarlett O'Hara swoon, back of hand to forehead)). It hurts,man. I was hoping the flirtation would turn into something more permanent. Alas, perhaps it's not meant to be.
Italy taxation open questions:
1. If I have two rental properties, one which shows a net positive income, and one which shows a loss, can I net the two totals for income tax calculations? (Hypothetical example: our house, after deducting interest, property tax, maintenance, insurance, earns us $10,000 per year and is reported on 1040 schedule E. Meanwhile, apartments, after depreciation, management fees, insurance, tax, etc. are on paper negative let's say, -10,000 per year, also reported on schedule E. Can we net these against each other in Italy? )
2. What about passive loss carry overs? Can we 'carry forward' previous year passive losses to offset this year's passive income for the purpose of Italy taxes?
3. If we get taxed as individuals, that means we can each claim a 4,800 euro deduction? In effect, does filing as individuals double the ranges of the tax brackets?
Sources:
http://www1.agenziaentrate.gov.it/english/italian_taxation/income_tax.htmNOTE: Modified US tax calcs per MDM catching an error.