Retiring Smart: U.S. vs. Italy (7% Flat Tax Scheme vs. Progressive Tax)
- Caesar Sedek
- Apr 4
- 15 min read
If you’re considering retiring abroad, you’re not just chasing a dream—you’re doing the math. And when it comes to the numbers, Italy’s 7% flat tax scheme often enters the conversation like a plot twist. But how does it really stack up? And what happens when the math looks too good—or too bad—to be true?
I’ve put together a side-by-side comparison of what retirement actually costs in the U.S. vs. Italy—under both the 7% flat tax scheme and Italy’s standard progressive tax system.
Before we dive in, I want to highlight a thoughtful and well-researched companion article that inspired this deeper dive: Is Italy’s Seven Percent Flat Tax Plan Worth Making the Move?
It’s one of the most complete and thorough breakdowns I’ve seen recently on how the 7% scheme plays out across different income levels, and it’s definitely worth a read. The author does a great job walking through the key considerations and sparking the kinds of questions more people should be asking.
That said, there are a few assumptions that I think could be revisited or expanded on to offer an even more complete picture—especially around tax treatment, actual cost-of-living differences, and income strategy. I’ve included those clarifications here, not as a rebuttal, but as a continuation of a valuable conversation.
Assumptions Matter: A Few Key Clarifications
To build on that foundation, I’d like to clarify a few points from the original article—just to make sure we’re all working from the most accurate and complete picture possible. These points don’t contradict the original analysis, but they expand on certain assumptions or interpretations that could benefit from a closer look.
1. The 7% Flat Tax is Not in Addition to U.S. Taxes
What Was Suggested: "While Italian taxes would be a modest 7%, the retiree would still be liable for the taxes due in the U.S., less the 7% foreign tax credit for payments already made to Italy. So, the net result is the retiree would be able to have their total taxes remain approximately the same as if they had lived in the United States.”
This line might give some readers the impression that retirees under the 7% scheme pay the full 7% to Italy, then pay an additional amount to the U.S. to “top up” to their regular U.S. tax rate. In practice, that’s not quite how it typically works.
Here’s how it actually works:
If you’re a U.S. citizen or green card holder living abroad, you’re taxed on your worldwide income. However, the U.S. offers a Foreign Tax Credit (FTC) to avoid double taxation—meaning you can apply foreign income taxes you’ve paid (like the 7% to Italy) against your U.S. tax bill on that same income.
According to IRS Publication 514:
“You can take a credit for income taxes paid or accrued to a foreign country… to reduce your U.S. tax liability on foreign-sourced income.”
A Simple Example:
Let’s say:
You earn $75,000/year in retirement income.
You pay 7% to Italy = $5,250
Your U.S. tax liability on that income, after deductions, is $5,000
Since you already paid $5,250 to Italy, you can apply that as a Foreign Tax Credit.
Result: You owe the U.S. nothing. There’s no “extra” tax due unless your U.S. tax rate is higher than 7%—and even then, you’d only owe the difference.
When Would You Owe More to the U.S.?
Only if:
Your effective U.S. tax rate is higher than 7%, and
The income in question is taxable by both countries
Even then, you’re not paying double—you’re paying the delta.
One More Key Clarification: Social Security Isn’t Double Taxed
The article touches on global income being subject to Italian tax, but it’s worth noting that under the U.S.–Italy tax treaty, U.S. Social Security benefits are explicitly exempt from Italian taxation—even under the 7% regime.
Tax Treaty Reference: Article 18
So if part of your retirement income is Social Security:
It’s only taxed by the U.S.
It’s excluded from your 7% Italian tax base
And therefore, it doesn’t factor into the Foreign Tax Credit either (because no foreign tax is paid on it)
This is a small but important point—especially for middle-income retirees whose Social Security makes up a meaningful portion of their income.
Resources
• U.S.–Italy Tax Treaty (PDF) – See Article 18 for Social Security and Article 23 for Foreign Tax Credit rules
Bottom line: The 7% tax is not “in addition to” your U.S. taxes—it’s often in place of them, thanks to the FTC. This is a crucial distinction that can significantly affect whether the 7% regime works in your favor. Always model your specific income streams and tax profile, and don’t rely on generalizations when making a decision this big.
2. Social Security Isn’t Taxed by Italy - Even Under the the 7% Scheme
What Was Stated: The article suggests that all worldwide income—including U.S. Social Security—is subject to Italy’s 7% flat tax regime.
That’s a very common (and understandable) assumption. But it’s one area where the U.S.–Italy tax treaty offers a clear exemption that’s worth highlighting.
Treaty Language Matters
According to Article 18 of the U.S.-Italy Income Tax Convention:
“Social Security payments and other public pensions paid by one Contracting State to an individual who is a resident of the other Contracting State shall be taxable only in the first-mentioned State.”
In other words: if you receive U.S. Social Security while living in Italy, only the U.S. has the right to tax it. Italy is excluded—no matter which tax regime you’re under.
How This Plays Out
Let’s say you receive:
• $30,000/year in U.S. Social Security
• $45,000/year from a traditional IRA
Under the 7% flat tax regime:
• The $30,000 from Social Security is excluded from Italian tax (but still taxed by the U.S.)
• The $45,000 IRA income is taxed at 7% = $3,150 to Italy
Under Italy’s progressive tax regime:
• The Social Security income is still U.S.-only
• The IRA income is taxed at standard IRPEF + regional/municipal rates (likely 35–43%)
This distinction is important—especially for middle-income retirees who may rely on Social Security for a substantial share of their income.
📄 Further Reading: IRS Publication 901 – U.S. Tax Treaties
3. The 7% Regime Does Cover Investment Income
What the article implies: That investment income (like interest, dividends, or capital gains) may be taxed separately under Italy’s usual capital income tax system.
This seems to reflect a misunderstanding of how comprehensive the 7% regime really is.
Here’s What the Italian Tax Authority Says
According to Circolare n. 21/E (2019) from Agenzia delle Entrate:
“The substitute tax of 7% applies to all foreign-source income, regardless of category, including employment income, pensions, self-employment income, business income, capital income (interests, dividends), capital gains, and rental income.” —§ 5.1, Circular 21/E
What This Means for U.S. Retirees in Practice
If you have:
• A traditional IRA or Roth IRA
• Dividend-paying ETFs or stocks
• U.S. rental income
• Realized capital gains
• Passive business income
All of that income falls under the 7% umbrella. You don’t pay Italy’s standard 26% capital gains tax, nor do you file separate schedules for dividends or rental income.
It’s not piecemeal—it’s one flat rate that simplifies your tax picture significantly.
Why This Matters
The article’s interpretation could lead readers to believe that certain income types would still be hit with additional Italian taxes—even under the 7% regime. That’s not the case.
In fact, for retirees with large investment portfolios, this is one of the most valuable aspects of the 7% regime. It not only lowers the rate—it reduces complexity and filing burdens, too.
Here’s a comparison:
Income Source | Under Italy’s Progressive Tax | Under 7% Flat Tax |
IRA withdrawals | Taxed at marginal IRPEF rates | Included at 7% |
Dividends | 26% capital income tax | Included at 7% |
Capital gains | 26% tax on realized gains | Included at 7% |
U.S. rental income | Taxed at marginal rate | Included at 7% |
U.S. pensions | Taxed at marginal rate | Included at 7% |
Note: U.S. Social Security is excluded from taxation under both the standard IRPEF system and the 7% flat tax regime, per the U.S.–Italy tax treaty.
Bottom line: While the original article raises thoughtful questions around investment income, it seems to suggest that interest, dividends, and capital gains would be taxed separately—even under the 7% regime. In reality, according to guidance from Agenzia delle Entrate, the 7% tax is a substitute tax that covers all categories of foreign income—including investment returns.
Rather than a piecemeal calculation, this is a flat, comprehensive approach—and it’s one of the reasons the 7% regime can be particularly advantageous for retirees with sizable portfolios or diverse income streams.
4. Property Tax, Insurance, and Healthcare Savings Add Up
The original article does acknowledge that Italy offers cost savings in these areas—but it undervalues just how significant they are, especially over a 10+ year horizon.
Let’s be clear:
🇺🇸 In the U.S. (FL, AZ, TX):
Property Taxes:
Florida: Avg. rate is ~0.9%, but many counties reach 1.2% or higher.
Texas: Avg. rate is 1.8%—one of the highest in the U.S.
On a $400,000 home, that’s $6,000–$7,200/year, every year.
Homeowner’s Insurance:
In high-risk zones (hurricanes in FL, wildfires in AZ, floods in TX), premiums now range from $2,500 to $6,000+ per year, especially with rising climate-related rebuild costs.
Source: Insurance Information Institute – Homeowners Premiums
Healthcare (Medicare + Supplements):
Medicare Part B (2024): $174.70/month per person = $4,192.80/year
Medigap Plan G + Part D + OOP = $8,000–$9,000/year for a couple
These costs rise annually, and IRMAA surcharges apply to higher earners
🇮🇹 In Italy:
Property Taxes (IMU):
No property tax on a primary residence unless it’s classified as luxury (Category A/1, A/8, A/9).
IMU only applies to second homes or luxury properties.
For most retirees, this means €0/year in property tax.
Homeowner’s Insurance:
Optional and very inexpensive—typically €150–€400/year.
Earthquake insurance (in seismic areas) can add cost but is still affordable.
Healthcare:
You buy into the Italian National Health Service (SSN) via a voluntary contribution.
Flat rate: ~€2,000/year per person (may vary slightly by region and income declaration).
Once enrolled, you get access to full public care with low or no copays.
No need for private insurance, though supplemental private plans (~€1,000/year) can enhance speed and comfort.
Do You Really Need to Withdraw That Much in Italy?
Let’s go back to the three couples from the original article:
• Couple A – €62,000/year in income
• Couple B – €124,000/year
• Couple C – €186,000/year
These numbers were used to model income tax exposure under Italy’s progressive tax system vs. the 7% flat tax regime—and they make for a good high/medium/low spectrum.
But here’s the thing…
Income isn’t the same as withdrawals.
And in Italy, your actual spending needs are often far lower than your theoretical income allows.
Reality Check: How Much Does Retirement in Italy Really Cost?
Once you move to Italy, the math changes.
Your cost of living drops—not because you’re “tightening your belt,” but because life here is simply less expensive in all the right ways.
• Couple A, with €62,000/year, is already in the sweet spot. That’s more than enough for a comfortable life almost anywhere in Italy. In reality, they may only need to withdraw €45K–€55K/year.
• Couple B, earning €124K/year, may still spend only €60K–€70K, unless they’re traveling a lot or living in Rome's or Milan’s historic core.
• Couple C, the “wealthy couple” with €186K/year, likely doesn’t need anywhere near that. In a well-located town or small city, they might live extremely well on €70K–€90K/year, and reinvest or defer the rest. Even in Florence's Centro Storico - that's a lot of money.
Unless you’re living an ultra-luxury lifestyle, most of that high income is optional. You don’t need to spend it—and you don’t need to withdraw it.
Why This Matters for Taxes
All three couples benefit from the 7% regime, yes. But what happens after 10 years?
Here’s where withdrawal strategy becomes just as important as where you live:
• If you keep drawing high income, your IRPEF liability post-7% will spike.
• If you cut back, living off just what you need, your Italian tax bill could shrink dramatically—even under the progressive system.
You go from paying €21K–€77K/year in IRPEF…
to maybe €6K–€12K/year, just by adjusting your drawdowns.
What Smart Retirees Do
During the 7% window:
Front-load Roth conversions
Harvest capital gains
Restructure rental/business income
Use the full tax shelter while it lasts
After 10 years:
Live off Social Security (taxed only by the U.S.)
Tap Roth IRAs tax-free in the US
Withdraw less from traditional IRAs
Consider moving to a low-IRPEF region
The result? Lower taxes, lower stress, and a lifestyle that’s far more sustainable.
Bottom Line: Just because you can withdraw €186K/year doesn’t mean you should—or will.
For most people, even Couple C, living in Italy means living better on less. And that means you can shift from chasing tax breaks to enjoying what you’ve already earned.
What Does It Actually Cost to Retire in Italy?
Now that we’ve cleared up the tax treatment, income types, and overlooked savings, let’s walk through a real-world comparison.
We’ve created a sample Retirement Persona—a U.S. couple, aged 60–65, with $75,000/year in income (Social Security + IRA/401k/Pension) —comparing what their retirement would cost in:
🇺🇸 Florida
🇺🇸 Arizona
🇮🇹 A small Italian town (under 20,000 people, eligible for the 7% flat tax)
🇮🇹 A mid-sized Italian city under Italy’s progressive tax system
We’ll break it down line by line: taxes, housing, insurance, healthcare, lifestyle, and more.
Assumption Table:
Category | Assumption Details |
Income | $75,000 USD annually (Social Security + IRA/pension) |
Home Value (U.S.) | $400,000 |
Healthcare (U.S.) | Medicare Part B + D + Medigap + out-of-pocket = ~$9,000/year |
Healthcare (Italy) | Voluntary SSN contribution + optional private = ~$3,000/year |
Utilities (U.S.) | FL: $300/mo; AZ: $250/mo – high due to A/C use |
Transportation (U.S.) | 2 cars, insurance, gas, maintenance |
Transportation (Italy) | 1 car + local transit; occasional use |
Dining/Food (U.S.) | $750/month = $9,000/year |
Dining/Food (Italy) | €600/month = ~$7,000/year (cheaper, fresher food) |
Travel | One international + domestic/intra-EU travel per year |
Home Insurance (U.S.) | FL: $3,500/year; AZ: $2,500/year |
Home Insurance (Italy) | ~€300/year |
Property Taxes (U.S.) | FL: ~1.5% of home value; AZ: ~1.2% |
Italy Property Tax | Negligible (~€500/year) |
Here’s how their annual costs stack up:
Category | U.S. (FL) | U.S. (AZ) | Italy (7%) | Italy (Progressive) |
Income Taxes | $7,000 | $6,000 | $5,250 | $21,000 |
Property Tax | $6,000 | $4,800 | $500 | $500 |
Homeowner’s Insurance | $3,500 | $2,500 | $300 | $300 |
Healthcare (Premiums + OOP) | $9,000 | $9,000 | $3,000 | $3,000 |
Utilities | $3,600 | $3,000 | $2,400 | $2,400 |
Maintenance/HOA | $2,000 | $2,000 | $1,200 | $1,200 |
Transportation | $8,000 | $8,500 | $3,000 | $3,000 |
Food & Dining | $9,000 | $9,000 | $7,000 | $7,000 |
Travel | $5,000 | $5,000 | $6,000 | $6,000 |
Other Lifestyle | $4,000 | $4,000 | $3,000 | $3,000 |
Total Estimated Annual Cost | $54,100 | $53,800 | $31,650 | $46,400 |
How It All Adds Up
The chart above gives you a clear view of where the real differences lie. Even under Italy’s progressive tax regime, the overall cost of retirement is still lower than in the U.S. thanks to dramatically lower housing, healthcare, and insurance expenses.
But if you qualify for and choose the 7% flat tax regime?
You’re looking at retirement costs 40% lower than Florida or Arizona, for a lifestyle that (arguably) offers more in return.
Bottom Line: Italy isn’t just cheaper in terms of taxes—it’s more efficient. You’re not throwing money into an overpriced healthcare system, inflated homeowner’s insurance, or property taxes that don’t even guarantee decent services.
This isn’t just about escaping the U.S.—it’s about optimizing your future.
And if you’re one of those folks obsessing over whether Italy’s tax deal is worth the “trade-off”? Hopefully now, the numbers speak for themselves.
What Happens After the 10-Year 7% Flat Tax Ends?
The 7% flat tax regime in Italy is generous—but it’s not forever. After 10 years, the tax incentive ends, and you’ll transition to Italy’s standard progressive income tax system (IRPEF), along with regional and municipal taxes.
So, what does that mean practically? Let’s break it down.
You Move to Progressive Taxation
After 10 years, your global income becomes subject to IRPEF:
Income Bracket (2025) | Tax Rate |
Up to €28,000 | 23% |
€28,001 – €50,000 | 35% |
Over €50,000 | 43% |
You’ll also pay:
• Regional tax (typically 1.2% – 3.3%)
• Municipal tax (0% – 0.9%)
• Wealth tax (IVAFE): 0.2% on foreign financial assets like bank/brokerage accounts
Yes—it’s a steep jump, especially if you’re used to the 7% regime. But it’s not a cliff; it’s a change. And there are ways to plan for it.
You Have Options
Here’s what savvy retirees do when their 10 years are up:
Option A: Stay Put, Accept the Higher Taxes
If you love your town and lifestyle, and your cost of living is low enough, the higher taxes may be worth it.
Bonus: You’ve already had 10 years of significant savings. The compounding effect of those savings may offset your future tax burden.
Option B: Move Within Italy to a Lower-Tax Region
Some regions in Italy are more favorable than others when it comes to regional and municipal tax rates. If you don’t have deep roots in your current town, a move could reduce your overall tax burden.
Option C: Restructure Your Income
Work with a cross-border tax advisor to:
• Front-load Roth conversions during the 7% years
• Shift income to lower-tax categories
• Minimize drawdowns during high-tax years
• Time large capital gains wisely
These tactics can blunt the impact of Italy’s progressive system post-7%.
Option D: Leave Italy (or Become a Tax Resident Elsewhere in the EU)
If you’re ready for a change, you can move to another EU country with lower taxes—or return to the U.S. and file as a non-resident of Italy. But by now, would you want to?
Let’s Look at the Numbers
Let’s say you’re earning $75,000/year in retirement income:
Scenario | Annual Tax Liability |
Italy (7% Flat Tax) | ~$5,250 |
Italy (Progressive Tax)* | ~$21,000–$24,000 |
*Assumes average regional + municipal add-ons
That’s a $15,000–$18,000/year swing, yes. But over 10 years, you saved $150,000+ in taxes. Not to mention reduced healthcare, insurance, and property tax costs along the way.
The key is to plan for the shift, not be surprised by it.
Bottom Line: The end of the 7% regime is not the end of the road—it’s just a fork in it.
With enough runway, good planning, and realistic expectations, you can make the post-7% years just as rewarding as the first ten.
How to Optimize Your Finances Before the 7% Regime Ends
Most people think of the 7% tax as a savings plan. But if you’re smart, it can be a strategic wealth accelerator—especially in years 1–10.
Here’s how to use the time wisely:
1. Front-load Roth Conversions
If you have a traditional IRA or 401(k), now is the time to convert.
Why?
• Under the 7% regime, you’re paying just 7% on the converted amount, instead of U.S. + Italian progressive rates later
• Future withdrawals from your Roth are tax-free in both the U.S. and Italy
A $100,000 Roth conversion would cost you $7,000 under 7%, vs. $28,000+ under IRPEF
2. Trigger Capital Gains
Selling long-held investments during the 7% window? Much smarter than waiting until the 26% capital gains rate kicks in post-7%.
This is your chance to rebalance, de-risk, or reallocate—while the tax cost is still flat and predictable.
3. Draw Down Taxable Accounts First
While your tax rate is low, it may make sense to draw down taxable brokerage accounts now, letting your tax-advantaged accounts continue to grow.
4. Structure Rental/Passive Income
Got U.S. rental income or passive LLC ownerships?
During the 7% regime:
• All of that income is included under the 7% flat tax
• No extra Italian business or investment tax layers
You can use this time to lock in low-tax gains or restructure ownership before things get more complex.
Where Should You Live After the 7% Ends?
Italy’s tax burden after year 10 depends heavily on where you live. Not all regions are created equal—some have lower regional and municipal taxes, and some regions even offer post-7% tax incentives.
Here are some top considerations:
Regions with Lower IRPEF Add-ons
(These add to the national income tax)
Region | Regional Tax | Municipal Range | Notes |
Abruzzo | ~1.73% | 0.2–0.5% | Affordable towns & small cities |
Umbria | ~1.6%–2.0% | 0.2–0.6% | Popular with expats, good value |
Marche | ~1.5%–2.1% | 0.2–0.6% | Beautiful coast + mountains |
Molise | ~1.5%–2.0% | 0.0–0.3% | Low cost of living, off the radar |
Trentino–Alto Adige | ~1.23% | 0.1–0.4% | Northern, efficient, German-speaking areas too |
Regions like Lazio (Rome) and Tuscany (Florence) often have higher taxes and higher living costs post-7%.
Consider “7%-Then-Progressive” Towns
Some towns that qualify for the 7% regime now are still great long-term bases even after the flat tax expires.
Look for:
• Low local tax rates
• Walkable, year-round livability
• Access to healthcare and transit
• Strong infrastructure without tourist saturation
Bottom Line: Don’t just count the 10 years—use them.
Use them to reposition your finances, rebalance your investments, and live a rich, low-tax life while building a sustainable long-term strategy. When year 11 rolls around, you’ll be ready—not surprised.
Final Thoughts on Retiring Smart
At the end of the day, the 7% flat tax regime isn’t a loophole—it’s a well-structured incentive designed to attract committed, long-term residents to parts of Italy that need new life. It rewards thoughtful planning, not clever dodging. When understood correctly, it can be a powerful tool—especially for retirees who take the time to structure their income wisely, respect the spirit of the program, and genuinely want to build a life in Italy.
There’s no one-size-fits-all answer here. Your ideal strategy depends on where you live, how much you spend, what kind of income you draw, and what kind of life you actually want abroad.
If this post helped clarify a few things, great. If it raised new questions, even better—that’s how good planning starts. I’m continuing to build tools, breakdowns, and guides to help others navigate this process as clearly and realistically as possible. Keep following for updates, and feel free to reach out or compare notes—la dolce vita is worth doing right.
Looking for 7%-Eligible Towns? Start Here.
One of the biggest challenges with the 7% flat tax regime is figuring out where you can actually live and still qualify. The requirements seem simple—fewer than 20,000 residents, located in a qualifying region—but in practice, the list isn’t always obvious or up to date.
To make it easier, I’ve pulled together a Notion database of 7%-eligible towns that includes:
Population stats
Region and province
Links to maps and resources where available
Filtering options to help narrow by size, region, or comune
This is a living resource, and I’ll continue to update it as more information becomes available. If you’re scouting locations or just curious what towns even qualify, this is a great place to start.
And if you’ve lived in or visited any of these towns, I’d love to hear your insights—let’s crowdsource smarter, not harder. If you comment below with your notes on vibe, liveability, infrastructure, or best affogato in town - I'll include it in the database for everyone to enjoy.
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