where do i deduct tax paid to italy on usa interest income since i am resident in italy but a usa citizen?

[gbriel]

...in 2024 I moved to Italy and became an Italian and because I reside in Italy and pay tax on worldwide income, including USA bank interest income, where do I show the tax credit (treaty related, as I have no foreign income as it relates to the USA) on my USA tax return in 2024?

[KrisD15]

First, enter your income. 

Next, go to 

• Deductions & Credits 
• Estimates and Other Taxes Paid
• Foreign Taxes    START or UPDATE 

[gbriel]

Do you mean "Foreign Tax Credits"?

The issue is I ONLY have Canada and USA interest income reported on my USA tax return for 2024, BUT I moved to Italy in 2024 and am now a tax resident there and have to pay tax on my worldwide income to Italy and thus don't want to pay tax on that same income to the USA in 2024.  In other words, my interest income is NOT "foreign sourced" and that is why I am confused as to how to go about getting the applicable tax credit on my USA tax return since Italy will have first taxing rights to that USA/Canada interest income.  I have NO other income at all in any country to report in 2024!

[gbriel]

I could go thru the Wages & Income section and where I have entered all of my 1099's showing the interest income earned in 2024 from my Canadian and USA bank sources and ADD a Foreign Taxes paid amount on each 1099 representing the actual tax that I will have to pay in Italy re 2024, but that isn't technically true re that box not being filled in on the respective 1099.  It also isn't true that the interest was EARNED in Italy, as it was sourced in the USA and Canada.  I could then go thru the Foreign Tax Credits section under Deductions and pick up the foreign tax entered on each 1099 to essentially then ensure I'd get the tax credit and pay no USA tax on those Canada and USA sourced interest amounts that are instead being taxed in Italy because I was tax resident there in 2024.  I know I won't owe USA tax on these interest earned amounts, but I cannot figure out how to best use turbotax and what the relevant sections are in your program to best reflect all of this!

[AmyC]

1. Yes, foreign tax credit is what you will use on your tax return. You may also exclude foreign earned income. See About Form 2555, Foreign Earned Income

2. Only have US and  Canada interest income reported. You need to add the rest.

Since you are a US citizen, you pay taxes on all income worldwide. 

3. You moved to Italy and reside there.

You have two helpful items:

• take the foreign tax credit for all double taxed income. Both Canada and Italy will be named.
• the other is the US - Italy treaty

4. Taxing rights may be dictated by the treaty or both countries tax you. If both, one of them will give you a credit for the other. The tax credit is for the lower of the taxes on the same income. If Italy has a lower tax rate, you will owe the US. 

5. Correctly enter your forms along with all foreign earned income and use the treaty and foreign tax credit when applicable.

Reference: 

Instructions for Form 1040 states:

Income 

Generally, you must report all income except income that is exempt from tax by law

[Edited 3/6/25 | 1:44 PST]

[gbriel]

Seriously Amy?  Renouncing citizenship simply to avoid double taxation when there are other ways to ensure the tax due as a USA citizen can be offset by the foreign tax paid on that same income?  I clearly stated that I have ONLY interest income sourced in Canada and the USA and that I reside in Italy so will be taxed there on my worldwide income.  I understand that I will have to re-source my interest income on form 1116 so that it can then be considered Italy sourced by treaty so that I can then generate the FTC necessary to apply against the USA tax due on that same interest income.  Italy taxes interest at a much higher rate then the USA does.  I am not sure if a form 8833 will also be required.  Most of what you said above isn’t applicable to my situation and honestly doesn’t represent good guidance.

[gbriel]

Tried asking about the Canadian sourced bank interest income and you responded, but respectfully I don’t think with the understanding that I pay NO tax to Canada at all (Canadian born and citizen, but have not resided in Canada since 1990 when I moved to the USA and later became a USA citizen…Canada, as opposed to the USA, taxes based upon residency only and even Canadian citizens have no income tax or filing related obligations if they no longer reside there).  Now living in Italy as a citizen there as well, I have to pay tax on my worldwide income (which in 2024 is just interest income earned in Canada and the USA).  In order to avoid USA tax on that same interest income, I have to use FTC’s of course.  Re-sourcing the USA sourced interest income under tax treaty as if it were sourced in Italy will allow me to use a FTC on the USA return.  Do I also re-source the Canadian interest income as if it were sourced in Italy since I pay no tax to Canada on it and have always paid USA tax on my Canadian sourced bank interest income?  I am a bit confused in that if I separate the Canadian sourced interest income on Form 1116 and call that “passive income” instead of “re-sourced income”, I would not be able to report any foreign tax on that same interest income paid to Canada.  Logically, I don’t believe I have to pay tax on the Canada sourced bank interest income to BOTH Italy (starting in 2024 when I became a citizen and also a tax resident there) and the USA (always have paid USA tax on the converted Canadian interest income prior to 2024).  

[DaveF1006]

It's simple. As a US citizen filing a resident return, you are required to report your worldwide income, which includes the Canadian Interest.  There are no exceptions to this rule unless you renounce your US citizenship, as AmyC has stated.

You would resource the income to Italy so you can claim a FTC for the tax you paid to Italy.    

@gbriel 

[gbriel]

I’m not sure it’s as easy as you say Dave.  I am a Canadian citizen and also a USA citizen and now an Italian citizen who moved to Italy in 2024 and became a tax resident there.  Regarding my Canadian bank sourced income and also my USA  bank sourced income, I am not sure that they can both be considered as “re-sourced by treaty” on Form 1116.  While I know for certain that the USA sourced interest income has to be re-sourced in order to be able to get a ftc for the Italian tax paid on that same USA sourced interest income, I am not sure that the Canadian sourced interest income is treated exactly the same way.  Isn’t the Canadian bank sourced income considered on a separate Form 1116 and “passive income”.  That is what I was asking about.  I pay no tax in Canada as taxation there is based strictly upon residency, not citizenship, and I haven’t resided there since 1990 when I moved to the USA.  I moved to Italy in 2024 where I procured my citizenship and also became a tax resident.

[RobertB4444]

As a US citizen all of your worldwide income is taxed in the US.  As an Italian resident all of your worldwide income it taxed in Italy.  Do the Italian tax return first and then file the US tax return just as if you lived here - which includes all of the Canadian income - and then take an FTC on everything that is taxed in Italy.

@gbriel 

[gbriel]

With all due respect Robert, that doesn't answer my very specific and somewhat nuanced question.  As a citizen of Canada and the USA and now Italy, where I am living and a tax resident, I of course understand that I have a filing obligation in the USA too because that is citizenship based.  Not so in Canada, where I haven't resided for many years and have no tax filing responsibility.  My question relates to Form 1116 and the FTC and how to accurately address the Canadian sourced interest income.  Of course Italy will tax my worldwide interest income because I am tax resident there.  The USA will of course provide a FTC for the tax that I pay on my USA sourced interest income and I am aware that I have to "re-source" that USA based interest income on Form 1116 in order to under tax treaty essentially pretend that the USA based interest income was sourced in Italy, as that will then provide the USA FTC re tax paid on that USA based interest income paid to Italy.  It is the Canada sourced interest income and Form 1116 that I am concerned about.  Would that also be "re-sourced" by ticking that box on Form 1116 just like I am doing for the USA based interest income?  Or alternatively, would the Canada sourced interest income be considered "passive income" with that box ticked on Form 1116?  As it relates to my USA tax and the FTC, I should of course get credit for the Italian tax that I will pay on BOTH my USA sourced and my Canada sourced interest income, so this is more of a technical question as it relates to Form 1116 and what box to tick for the Canada sourced interest income.

[gbriel]

If the so called TT "experts" refuse to answer on any reasonable questions like these on a timely basis from someone who has a bit of personal tax experience himself, then why would you recommend that I continue to utilize your software for filing my returns?  If your software was easier to follow (or your explanation related tabs being more complete), questions like these would not have to be asked in the first place.