I just recently received this from a newsletter and it explains the whole confusing US vs Italy Social Security tax treaty in a fairly logical and amusing way. Their example is the UK, but the same rules apply to Italy.
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Use an Income Tax Return for Zero U.S. Tax
The U.S. tax rate on Social Security benefits can be zero for the lucky residents of a few countries. The zero tax rate is achieved by filling in Form W-8BEN correctly -- especially Lines 9 and 10.
Which Countries?
There are only a few countries whose income tax treaties have this special benefit for Social Security, even though the United States has dozens of income tax treaties in force.
The IRS publishes a list of treaties (warning: PDF). But because I want to make your life easy :-) here is a list of the countries for which there are special tax rules for Social Security benefits:
Country Treaty Article U.S. Tax Rate
Canada XVIII(5), 4P2(2) 0%
Egypt 20 0%
Germany 18(5), PVIII 0%
India 19(2) 0%9
Ireland 18(1)(b) 0%
Israel 21 0%
Italy 18(2) 0%
Japan 17(1) 0%
Romania 17 0%
Switzerland 19(4) 15%10
United Kingdom 17(3) 0%
Are You Even Eligible? The Ambiguous Treaty
Income tax treaties are like a trump card that only the taxpayer holds. They state a parallel set of tax laws, and you can choose those tax laws over the default rules in the Internal Revenue Code.
Whether you are eligible to choose the treaty's tax laws is the critical question. You must look at your treaty and decide whether you are eligible to use the treaty to eliminate U.S. tax on your Social Security benefits.
Residents Only
The U.K./U.S. treaty, for instance, tells us who may take advantage of the treaty rules:
Except as specifically provided herein, this Convention is applicable only to persons who are residents of one or both of the Contracting States.11
For a noncovered expatriate using the U.K./U.S. income tax treaty to zero out U.S. income tax on U.S. Social Security benefits, the job is simple (!):
Figure out if you are a "resident" of the United Kingdom; and
Look through all of the rest of the treaty to see if there are any exceptions to the rule that might apply to you.
The Savings Clause Takes Away Eligibility
All U.S. income tax treaties have a special rule in them: the United States gives a bunch of tax concessions to residents of the other country, but then pulls back those tax concessions for its citizens and residents. The United States does not want its taxpayers (citizens and residents) using treaties to dodge U.S. taxes.
This is called the "savings clause." In the U.K./U.S. income tax treaty, it is found at Article 1(4):
Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
This means that a U.S. citizen living in the U.K. will be subject to U.S. tax, and must pretend that the U.K./U.S. income tax treaty had never been signed.
-------
Use an Income Tax Return for Zero U.S. Tax
The U.S. tax rate on Social Security benefits can be zero for the lucky residents of a few countries. The zero tax rate is achieved by filling in Form W-8BEN correctly -- especially Lines 9 and 10.
Which Countries?
There are only a few countries whose income tax treaties have this special benefit for Social Security, even though the United States has dozens of income tax treaties in force.
The IRS publishes a list of treaties (warning: PDF). But because I want to make your life easy :-) here is a list of the countries for which there are special tax rules for Social Security benefits:
Country Treaty Article U.S. Tax Rate
Canada XVIII(5), 4P2(2) 0%
Egypt 20 0%
Germany 18(5), PVIII 0%
India 19(2) 0%9
Ireland 18(1)(b) 0%
Israel 21 0%
Italy 18(2) 0%
Japan 17(1) 0%
Romania 17 0%
Switzerland 19(4) 15%10
United Kingdom 17(3) 0%
Are You Even Eligible? The Ambiguous Treaty
Income tax treaties are like a trump card that only the taxpayer holds. They state a parallel set of tax laws, and you can choose those tax laws over the default rules in the Internal Revenue Code.
Whether you are eligible to choose the treaty's tax laws is the critical question. You must look at your treaty and decide whether you are eligible to use the treaty to eliminate U.S. tax on your Social Security benefits.
Residents Only
The U.K./U.S. treaty, for instance, tells us who may take advantage of the treaty rules:
Except as specifically provided herein, this Convention is applicable only to persons who are residents of one or both of the Contracting States.11
For a noncovered expatriate using the U.K./U.S. income tax treaty to zero out U.S. income tax on U.S. Social Security benefits, the job is simple (!):
Figure out if you are a "resident" of the United Kingdom; and
Look through all of the rest of the treaty to see if there are any exceptions to the rule that might apply to you.
The Savings Clause Takes Away Eligibility
All U.S. income tax treaties have a special rule in them: the United States gives a bunch of tax concessions to residents of the other country, but then pulls back those tax concessions for its citizens and residents. The United States does not want its taxpayers (citizens and residents) using treaties to dodge U.S. taxes.
This is called the "savings clause." In the U.K./U.S. income tax treaty, it is found at Article 1(4):
Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
This means that a U.S. citizen living in the U.K. will be subject to U.S. tax, and must pretend that the U.K./U.S. income tax treaty had never been signed.
