A Tale of Two Tax Homes
Or, paying taxes when you live in 2 different places.
It’s an odd time of year to be thinking about the Christmas story, but I live in Italy, where pictures of Mary and the infant Jesus are everywhere, so perhaps it’s understandable. Specifically, I spend a lot of time reflecting on the opening chapters of the book of Luke, wherein the Roman (i.e. Italian) emperor puts out a census and Joseph can’t register in the place where he’s been living for at least long enough to have a nine-months-pregnant wife and has to haul ass (by which I mean donkey) to Judea, aka Bethlehem, due to a complicated tax-home requirement based on patrilineal inheritance laws.
I feel you, holy family. From across two millennia, I feel you.
After a little more than a year of comical delays (in which my quick-process paperwork got lost in the wrong file cabinet for seven months; was found again but used to issue an ID with the wrong sex on it; and was swiftly corrected and reissued thanks to a helpful phone call from the governor of Abruzzo, who owes a favor to owes a favor to owes a favor to), my neither-fish-nor-fowl “here with my E.U. spouse” invisible visa converted over to a permesso di soggiorno, the Italian equivalent of a green card.
I immediately contacted my previous full-time employer in the U.S. to see whether they’d like me to start telecommuting internationally to cover an understaffed overnight shift which for me would be more like 9-to-5. I like to imagine that the second I sent my e-mail, a crack legal team including Clair Huxtable, Elle Woods, Miranda Hobbes, and Sam Seaborn immediately assembled in the H.R. department, loosening ties and carrying blatantly empty coffee cups.
Their answer: Yes. Definitely yes. We will work out the technical end. But what’s your tax withholding?
My answer took some research.
National Income Tax:
Both Italy and the U.S. tax residents on worldwide earnings, not just what’s earned on their territory. (This is apparently unusual, but it’s what I’m used to.) However, they have agreed that for the most part they won’t both claim the same person.
For U.S. citizens (which I am), “residency” is up for interpretation. It’s a balance of evidence that depends a little bit on where you feel at home. In other words, it’s not necessarily about your physical location: it’s about where you’re domiciled. I’ve spent only 31 days of 2016 in the United States, but a good portion of my family is still at my U.S. address, where I still receive mail, and where most of my stuff is. I still have a U.S. phone number. I work for a U.S. company, which deposits my checks into U.S. bank accounts. I celebrate the 4th of July by singing patriotic songs all day long. Despite living in Italy, I might still live in America. It’s a grey area.
Nope, says Italy. Nope. No grey area. We don’t care about domicile. Your feet have been on our territory for more than half the calendar year. The fact that my money is from U.S. companies or that I’m VPNing in to work in the U.S. matters not at all. I am sitting in a room in Italy while I earn money. So my income tax is Italian.
Tax recipient: Italy
This seems fair, even though I suspect I’d pay slightly lower taxes in the U.S. I am in Italy, and I am a burden on their infrastructure, not the U.S.’s. For the same reasons, I’m exempt from the Affordable Care Act. I’m not the U.S.’s problem.
I am, however, my problem. As the only agent of my company in this entire country, I am the Italian office, and I have to do my own income tax withholding. But how? As a side-gig freelancer used to submitting estimated quarterly taxes, I equipped myself with pay stubs and spreadsheets and hurried to an expert, prepared to cough up a fee somewhere in the low three figures. What I failed to account for is that paying taxes in Italy is incredibly easy.
Italy has a type of office called a CAAF, which stands for Centro Autorizzato di Assistenza Fiscale. There is not an equivalent in the U.S. It’s like a legal aid nonprofit focused on benefits claims and tax preparation. A lot of them are connected to trade unions. I headed to a non-affiliated CAAF that I knew worked with foreigners, around the corner from city hall. It was two rooms big. I waited for a little while in an empty linoleum room, watching motorcycles go by, until I was summoned to the second room, where a woman in a t-shirt gave me a link to a tax estimator website and told me to come back in a year. This consultation cost me zero euros, and as far as I know the one next year will also cost me zero euros.
Income tax in Italy is called “Irpef” (imposta sul reddito delle persone fisiche). It’s due in September, but there’s a small penalty if you don’t have all your withholding in by July. There’s not any incentive to turn it in sooner than that. And if, like my husband, you have an employer withholding Irpef from your paychecks, you don’t ever have to file a tax return. You can, if you think you might get some money back through the “19% allowance” (which allows you to deduct 19% of healthcare expenditures, charitable contributions, school costs, insurance and veterinary fees, and various other stuff you might collect receipts for). But you don’t have to.
As for me, I’ve set up automatic monthly deposits from my U.S. checking account to an escrow-ish U.S. savings account. I’ve set my withholding amount about 15% higher than what the calculator tells me I’ll probably owe. Part of this is reasonable caution — I’d rather have extra savings than not enough — and part of it is a hedge against dollar/euro fluctuations. I say “hedge” because I’m betting the dollar will strengthen against the euro between now and July 2017, because the future is not the present.
I’m waiting to move my money.
(My currency-trade hot take: In the aftermath of the Brexit vote, the remaining 27 Euro countries are divided over whether the E.U. should become more federal or devolve more power to member states. This is happening against a backdrop of mass immigration by people fleeing war zones including Syria, which has put a huge financial strain on the southern European countries which are already hamstrung by IMF-imposed austerity on the back of 2009’s sovereign debt crisis — a banking mess which Europe still hasn’t finished unwinding, as you know if you’ve been following Deutsche Bank news. Financial markets are watching to see if Italy’s probably-helpful constitutional referendum goes through, but from the mood on the ground I think Italian voters are poised to reject it for emotional and cultural reasons. Meanwhile, there’s a lot of agita around the upcoming French and German elections, where we might see significant handoffs.)
(Shorter version: I think Hillary is going to win, the Democrats are going to pick up Senate seats, the Fed will raise rates, and we may get some actual monetary policy.)
For income tax, all that matters is where I am. But for payroll taxes, what matters is the location of my employer. Thanks to a Totalization Agreement between the U.S. and Italy, which the Social Security Administration has helpfully summarized in a handy chart, I can (in fact must) continue to pay into Social Security and Medicare instead of the Italian pension system.
Tax recipient: U.S.
Which among other things means I’ll still have to do estimated quarterly “self employment tax” payments for any of my freelance income.
The United States of America is a federal system. It’s right there in the name: united states. It’s not possible to be “just American” any more than it’s possible to be “just European.” You’re a citizen of a state. U.S. citizens born outside the U.S. count as part of the state of their parents, or their parents’ parents. As a Texan, I find this very stirring. Texas forever, I say. Texas head to foot to ovaries.
However, I’m claimed by Massachusetts. I’m on the Massachusetts census and I just finished filling out my absentee ballot for the November election, where I was able to vote on granular issues like school boards and marijuana regulations. Should I have this kind of power in a place from which I am largely absent? Perhaps not, but I do still pay taxes there. I have to pay Massachusetts income tax until such time as I can prove I’m a resident of another state in the U.S. Not a state in Europe. In the U.S.
It’s possible that a few years from now, I’ll decide I’m unlikely enough to return to Massachusetts that I won’t risk back-tax fines if I stop paying. It’s also possible that I’ll decide to throw money into lobbying the Massachusetts legislature to create a foreign earned income exemption for me. (The only one they have right now is with Canada.) At the moment, they’re in a budget crisis and I don’t think I’d get much traction.
Thus I’ll be paying a flat 5% of my income to subsidize a state where the average person earns more than me, and I won’t get any tax credits or deductions because they’re all based on trying to stimulate the Massachusetts economy and the tax guys know I’m not physically there. Nice one, y’all.
I also pay a small income tax to the state and city in Italy where I actually live.
Tax recipients: Massachusetts (withheld by employer), Abruzzo and Pescara (withheld by me)
The upside is that my senator is Elizabeth Warren instead of Ted Cruz, and I can suddenly put an exact dollar value on that.
Garbage Collection Tax:
Although for income tax, I’m a resident of Italy for the entirety of 2016, my residency from the point of view of government services didn’t begin until after I received my permesso, and was able to register (was required to register) with the local census office, the anagrafa. This involved a home visit from a middle-aged bureaucrat who rang my doorbell at a random time of day and came inside to figure out whether this seemed like a full-time residence. We sat down at my kitchen table, co-signed a piece of paper, and that was that.
That sounds enough like an immigration services visit in the U.S. that it might seem tied to my status as a foreigner, but it’s not. This happens with citizens too, whenever they move. Since there’s a single-payer health system, and since as far as I can tell school funding is based on headcount instead of property taxes, it’s important to keep track of where people actually are, not just where they get their mail.
It’s by that measure of residence that our household’s garbage tax is calculated. It’s also from that point forward that the one-year countdown starts on my driver’s license. After a year of anagrafa-registered residency, I have to either obtain an Italian driver’s license (an ordeal), or stop driving. Not that I drive now. But I could, and it would be legal with my Massachusetts license (which I think indicates insufficient fear of Boston drivers).
Tax recipient: Pescara, but not before September
As a woman whose heart is in Texas, body is in Pescara, workplace is in Virginia, film project is in Paris, publishing company is in New Mexico, and political representation is in Massachusetts, I will be rigorously diligent in correctly separating my recyclable waste. As a citizen of the world, it’s the least I can do.