The 7% Flat Tax in Italy: What It Really Means for Retirees

This isn’t the first post I’ve written about the 7% flat tax or the tax implications of different retirement income streams. But it is, hands down, the most contentious and wildly misunderstood topic I’ve come across in expat circles. Every time the subject of Social Security, IRAs, or pensions comes up in Facebook groups, the comment threads spin into chaos: half-truths, confident but wrong assertions, and very little in the way of sources.

Let’s face it — most people in those groups aren’t tax professionals, commercialisti, or lawyers. Neither am I. But I’ve spent time digging into the Italian legislation, the U.S.–Italy tax treaty, and professional guidance from actual CPAs and cross-border tax experts. What follows is a clear walk-through of how the 7% scheme interacts with the most common U.S. retirement income sources. Every section includes numbers and sources so you can see the mechanics for yourself.

What the 7% Regime Is Supposed to Do

Italy created the “7% flat tax regime” in 2019 to attract foreign retirees. The headline promise is simple: pay just 7% on your pension income from abroad for ten years if you settle in a qualifying town.

The basics:

• Applies for 10 years.

• Requires residence in a town under 20,000 people in designated regions of southern and central Italy.

• Covers “foreign pension income” (redditi da pensione di fonte estera).

• Substitutes for Italy’s progressive income tax rates.

Sounds straightforward, but the catch is defining what counts as “pension income” and how treaties handle different U.S. income streams.

The Big Categories of U.S. Retirement Income

Here’s how each type of U.S. retirement income fits into the Italian framework.

Social Security Benefits

Under Article 18(2) of the U.S.–Italy tax treaty, Social Security benefits are taxable only in the country of residence. That means once you become an Italian tax resident, Italy gets exclusive taxing rights over your Social Security.

Contrary to what you often hear in Facebook threads, the U.S. does not tax Social Security for residents of Italy. The saving clause, which usually lets the U.S. override treaties, explicitly exempts Social Security.

Bottom line: Italy taxes it. The U.S. does not.

IRA Withdrawals

Traditional IRA withdrawals are taxable in the U.S. as ordinary income and are also considered pension income in Italy. Under the 7% regime, Italy applies its flat rate. The U.S. still taxes, but you can use foreign tax credits to avoid double taxation.

Bottom line: Taxed by both, credits prevent double tax.

Private Pensions and Annuities

Employer pensions and private annuities are treated as pension income by Italy. Both are taxed at 7%. The U.S. also taxes them, with credits balancing out.

Bottom line: Fully subject to the 7% scheme.

U.S. Government Pensions

Article 19 of the treaty says pensions paid by the U.S. government for past government service are taxable only in the U.S. That includes federal, state, and military pensions. Italy does not tax them, and they are not eligible for the 7% regime.

Bottom line: U.S. only.

VA Disability Benefits

These benefits are not taxable in the U.S. and are not considered taxable pension income by Italy. They remain tax-free.

Bottom line: Not taxed anywhere.

Roth IRA Withdrawals

Qualified Roth withdrawals are tax-free in the U.S. Italy, however, often views them as pension income unless explicitly exempted. This is a gray area where practice can vary, and you’ll want a commercialista who understands cross-border retirement.

Bottom line: Likely taxed in Italy unless carefully defended.

Worked Examples:

Scenario A: Social Security + IRA ($60k Total)

• $35,000 Social Security

  • U.S.: Does not tax. The treaty (Article 18) gives exclusive taxing rights to Italy.

  • Italy: Taxes it at 7% under the flat regime. $35,000 × 7% = $2,450.

  
  

• $25,000 IRA withdrawals

  • U.S.: Taxes it as ordinary income (let’s say 12% bracket for a modest filer = $3,000 owed).

  • Italy: Also taxes it at 7%. $25,000 × 7% = $1,750.

  • But you use a foreign tax credit. That $1,750 paid to Italy offsets your U.S. liability on this piece.

Totals

• Italy: $2,450 (SS) + $1,750 (IRA) = $4,200.

• U.S.: $3,000 on the IRA, but reduced by the $1,750 credit. Effective U.S. liability = $1,250.

👉 Bottom line: You pay $4,200 to Italy and $1,250 net to the U.S., no double taxation.

Scenario B: IRA + Private Annuity ($60k Total)

• $40,000 IRA withdrawals

  • U.S.: Taxed as ordinary income (again, assume 12% = $4,800).

  • Italy: 7% flat rate = $2,800.

  • Foreign tax credits reduce U.S. liability.

  
  

• $20,000 Private Annuity

  • U.S.: Taxed as ordinary income (12% = $2,400).

  • Italy: 7% flat rate = $1,400.

  • Credits balance again.

  
  

Totals

• Italy: $2,800 (IRA) + $1,400 (Annuity) = $4,200.

• U.S.: $7,200 combined, reduced by credits for $4,200 already paid to Italy. Net U.S. liability = $3,000.

👉 Bottom line: You pay $4,200 to Italy and $3,000 net to the U.S.

Scenario C: U.S. Government Pension + VA Benefits ($60k Total)

• $50,000 U.S. Government Pension

  • U.S.: Taxes it as ordinary income. Let’s assume a 12% bracket again for simplicity → $50,000 × 12% = $6,000.

  • Italy: Does not tax it. Article 19 of the treaty says government service pensions are taxable only in the U.S.

  
  

• $10,000 VA Disability Benefits

  • U.S.: Does not tax it. VA benefits are excluded from U.S. taxable income.

  • Italy: Does not tax it. Not considered pension income under Italian law.

  
  

Totals

• Italy: $0 (neither income source is taxable there).

• U.S.: $6,000 (only on the government pension).

👉 Bottom line: You pay $0 to Italy and $6,000 to the U.S.

Expert Clarification: The Social Security Debate

Here’s where I’ll cite directly. I asked the U.S. Expat Tax Lounge (moderated by CPAs like Mike Mertz) this exact question:

Does Italy really tax Social Security, or does the U.S.?

Their breakdown:

• Italy taxes Social Security if you’re resident there.

• The U.S. does not. Article 18 of the treaty gives exclusive taxing rights to Italy, and the saving clause does not override it.

• No double taxation.

• Compliance: you report Social Security on your Italian Modello 730 or Modello Redditi. On your U.S. Form 1040, it is excluded.

That’s the authoritative position. The conflicting advice you see online usually comes from people misreading the saving clause or confusing Article 18 (Social Security) with Article 19 (government pensions).

Key Takeaways

• Social Security → Italy only.

• Government pensions → U.S. only.

• VA benefits → tax-free.

• IRAs, annuities, private pensions → taxed in Italy at 7%.

• Roth IRAs → gray zone, likely taxed by Italy.

The 7% flat tax is a powerful tool, but it is not one-size-fits-all. Your specific income mix determines how it plays out.

Sources

• U.S.–Italy Income Tax Treaty, Articles 18 and 19.

• Agenzia delle Entrate, Circolare n. 21/E (2019).

• Mike Mertz, CPA, U.S. Expat Tax Lounge (August 2025).

• Greenback Expat Tax Services, “Italy 7% Pension Regime.”

• Expat Tax Professionals, “U.S. Social Security and the Italy Tax Treaty.”

Final Word

The Facebook threads will keep spinning in circles, but the treaty language and expert commentary are clear. If you plan to move under the 7% regime, run the math on your actual income sources. Social Security and government pensions are treated very differently, and Roth IRAs can be a trap if you assume U.S. tax-free equals Italy tax-free.

Understanding the tax side is only one piece of the retirement-in-Italy puzzle. You still need to figure out where to live, how to qualify for the ERV, and how to navigate the consulates without losing your mind.

That’s exactly why I built two tools:

• 7% Town Finder → a searchable database of every qualifying town under the regime so you don’t waste time guessing.

• Visto Facile (coming soon) → a step-by-step digital guide to the ERV process, built from real consulate data, with checklists, timelines, and income trackers.

And if you want one-on-one help running your own numbers, building an ERV strategy, or just cutting through the noise, I offer consulting for U.S. retirees planning the move.

Because at the end of the day, moving abroad isn’t just about dreaming — it’s about planning with precision so the Italian taxman doesn’t surprise you.