IRPEF - Personal Income Tax
IRPEF stands for “Imposta sui Redditi delle Persone Fisiche”. And this is the tax that will take the biggest bite out of your pocket. As we said before, there are really three separate IRPEFs: National, Regional, and Local. Here we will focus on the national IRPEF, which is by far the heaviest. If you are a tax resident in Italy (which for them means you were living physically in Italy for more than 183 days in the calendar year), Italy taxes you on their worldwide income. But unlike the IRS, they don’t seem to have any real means to know what you earn in other countries, even in neighboring Monaco and San Marino – a fact highlighted by the “amnesty” they declare every couple of years by which they allow tax cheats to repatriate capital with a minimal tax, and no questions asked. But be careful if you are a citizen of another EU country – starting 2005 there should be a formal exchange of tax-related information at EU level.
So how much does one pay in tax in Italy? At least with the reductions in tax rates, Mr. Berlusconi is helping us all out (and especially himself and his cronies). As an employee, the income tax rates for 2005 are the following, based on your gross income after deductions.
For income from 0 to 26.000 Euros: 23%
For income from 26.000 to 33.500 Euros: 33%
For income from 33.500 to 100.000 Euros: 39%
For income above 100.000 Euros: 43% (39% plus a 4% solidarity tax)
So for example, if your gross income after deductions is 97.000 Euros, you will pay:
- 23% x 26.000 = 5.980 Euro
- 33% x (33.500 – 26.000) = 2.250 Euro
- 39% x (97.000 – 33.500) = 24.765 Euro
TOTAL = 32.995 Euros
At the regional and local levels, there are all kinds of different rates. Best to consult your comercialista for the rates in your region and township. But to give you a quick and generic idea, the approximate ratio of national IRPEF to regional and local IRPEF for a small town in the province of Turin is about:
National : Regional = 1 : 0,035
National : Local = 1: 0.01
So going back to your gross income after deductions of 97.000, you would pay about 1.155,00 Euros for regional IRPEF and about 335,00 Euros for local IRPEF. This may change for the worse since many regional and local governments, faced with less money from the national government, are moving to increase their taxes.
The “otto per mille” is a contribution that you can make to a recognized church. This is not an extra amount to pay but rather an option to dedicate 0,8% of your tax payment to a Church of your choice. On your return (the 730 or the UNICO), you will have to indicate to which Church you want to give the “otto per mille”.
If you are an employee, these taxes for the most part will be taken from your paycheck. The amount withheld will be a function of your expected gross income and the number of deductibles you have, which you must declare to your employer at the beginning of the year (see list at the end of this article). However, generally they end up taking out a bit more than they should, especially if you choose for personal reasons not to communicate all the potential deductibles to your employer, or if you had unforeseen deductibles (i.e. unreimbursed medical expenses). So it is probably in your best interest to file the 730 or the modello UNICO for more complicated tax situations – these are the Italian tax return forms.
At the beginning of each year (usually around late February) your company will provide you with a statement of income paid and tax (national, regional, and local) deducted for the prior year. This form is referred to as the “CUD”. If you worked for more than one company in the prior year, you should receive one CUD for each company that you worked for.
Note also that in Italy, the concept of joint tax returns for husband / wife does not exist – each person will have to file an individual return. The only (minimal) thing you can do is have permissible deductions (such as for children) be deducted exclusively from the income of the one (wife or husband) that earns more, (instead of splitting the deduction between the two) so that the marginal tax is less.
If you are self-employed, then it gets more complicated. Be sure to hire a commercialista. The process will depend on what type of self-employed status you choose for yourself. This can be: “collaboratore” which is like an employee in many ways, except that it is very temporary in nature; “occasional work – “lavoro occasionale”; “libero profesionista” which is a freelance professional – either in a formally recognized profession such as a medical doctor, or something like a relocation consultant or artist. And the final option is to become an independent business person. For more information on how to set yourself up to work in one of these categories, please see the section on work & career.
A first option, doing “occasional work” (lavoro occasionale), means that when you get paid you issue a tax receipt, or “ricevuta fiscale” which shows the amount paid, minus a 20% contribution taken out, without and VAT or social security contributions. This is really intended for the true occasional job – so you would do well to refrain from overdoing this possibility and switching to a more “stable” form of relationship – either as a “collaboratore” or as an independent professional “libero profesionista”.
As a collaboratore, you will follow pretty much the same process as if you were a “normal” employee, having a portion of your pay withheld by your (temporary) employer and then you filling out a 730 or a UNICO after the end of the year. One thing that is important here is that you obtain a statement from your (temporary) employer on the amounts paid and withheld shortly after completing the assignment. After a long time, you could have difficulty contacting the company and getting your documents (it wouldn’t be the first time).
As a “libero profesionista” you will have to register as such – more details in the section “Work & Career”. Key to know here is that you will have to have a VAT registration (IVA) number. It also makes for the heaviest administrative load – you will have to keep close track in ledgers, etc. of your expenses and revenues, and issues invoices, which among other things will have to show a 20% withholding and a 4% pension contribution. When the tax year is ended, all your clients will have to issue you a statement showing how much was deducted and forwarded to the fisco, and these amounts will be deducted from the total calculated tax due.
If you then make the jump to become an independent business person, you would need to form an Snc (Società in nome collettivo) which is a form of partnership. In this case, you need to register this partnership for VAT (IVA) purposes. In this case, you will issue invoices that include the VAT, but no withholding tax – so be sure to build up reserves throughout the year so that when tax time comes you have the money available to pay the tax. In any given year, you will have to make two payments on two separate deadlines – one on May 31, where you pay the missing balance of tax due for the prior year as well as a first advance on the tax for the current year. Then on November 30 you need to pay a second advance on the tax for the current year. Again, here good record-keeping is essential – you may be audited, and in any case keeping track of expenses will help to identify those that are deductible.
Speaking of deductibles: For personal income tax, these include things like number of children, expenses for life insurance, medical expenses, mortgage interest, etc.. See the next section for more detail…