@bryto , since your passive income source ( interest / dividends etc. ) is US and both US and Italy are taxing this, you need to resource the income US tax Purposes. You generally do this by filing a form 1116 and selecting the category as " certain income resourced by treaty " Here is a link to the US-Italy treaty, including the technical explanations:
Italy - Tax treaty documents | Internal Revenue Service (irs.gov)
However there are two issues here that you have to work through:
(a) the treaty requires the tax rate be limited to 10% -- in the UJSA you achieve this by reducing / adjusting the gross income resourced by treaty -- IRS publishes a table on the adjustment to use. There is also the limitation of form 1116 -- you get an allowable credit of lesser of actually paid or allocated US taxes on the same income.
(b) a second issue is because the foreign taxes paid/ accrued on this doubly taxed foreign income is probably under the safe harbor amount of US$300 per filer ( i.e. US$600 per joint filer ) but to claim this benefit ( and not use the form 1116), you need to resource the income that can only be done using the form 1116.
If you can provide me more exact figures of the situation , I can simulate on Home & Business copy I have and also do more search ( look at the statutes and words thereof ) on if it is possible to resource without using form 1116.
Is there more I can do for you ?
