Introduction: A Passport That Comes with Tax Obligations
Imagine Giulia, 45 years old, born in Boston in 1981 while her father was working there as a researcher. She returned to Italy at the age of two, studied in Milan, works as an architect in Turin, pays taxes in Italy, and has never had an American bank account.
One day, her bank asks her to complete a form declaring whether she is a “US Person.” Giulia then discovers that, for U.S. tax purposes, she is considered a full-fledged American taxpayer and has always been subject to the obligation to file an annual income tax return with the Internal Revenue Service (IRS).
This is not an exceptional case. The United States, together with Eritrea, is the only country in the world that systematically applies what is known as citizenship-based taxation, meaning taxation based on citizenship.
This article explains what this means, how it works in practice, how it differs from the Italian and European tax systems, the risks it entails, and the only definitive way out.
1. The General Principle: You Remain a Taxpayer as Long as You Are a Citizen
The basic rule is straightforward: every U.S. citizen is required to report their worldwide income to the IRS, regardless of where they live or work, throughout their lifetime.
The same principle applies to green card holders (lawful permanent residents), although this article focuses on U.S. citizens.
The starting point is how American citizenship is acquired. The Fourteenth Amendment to the U.S. Constitution establishes the principle of jus soli, or birthright citizenship: anyone born on U.S. soil is an American citizen from birth, regardless of their parents’ nationality.
Recently, the U.S. Supreme Court rejected the Trump Administration’s attempt to eliminate birthright citizenship.
Therefore, being born in a New York hospital while one’s parents are temporarily working in the United States may be sufficient to acquire a citizenship that, from a tax perspective, has no expiration date.
As a result, the connection to the U.S. tax system does not depend on where a person lives, where their income is earned, or how much time they have spent in the United States. It depends solely on citizenship, even if the person has never applied for a U.S. passport.
2. How It Works in Practice: The Three Pillars of Tax Compliance
Form 1040: The Annual Income Tax Return
The first obligation is filing Form 1040, the American equivalent of the Italian individual income tax return (Modello Redditi Persone Fisiche).
A U.S. citizen living abroad must file this return annually if their worldwide income exceeds certain thresholds, which are relatively low and generally correspond to the standard deduction (approximately $15,000 for a single taxpayer).
Reportable income includes salaries, professional fees, rental income, dividends, and interest earned in Italy, converted into U.S. dollars.
However, filing a tax return does not necessarily mean paying U.S. taxes.
Two principal mechanisms help prevent double taxation:
- Foreign Earned Income Exclusion (Form 2555): Allows eligible taxpayers to exclude foreign earned income from U.S. taxable income, up to an annual limit adjusted for inflation ($130,000 for 2025).
- Foreign Tax Credit (Form 1116): Allows taxpayers to claim a credit against U.S. income taxes for qualifying taxes already paid abroad, such as Italian personal income tax (IRPEF).
FBAR (FinCEN Form 114): Reporting Foreign Bank Accounts
The second pillar is the Report of Foreign Bank and Financial Accounts, commonly known as the FBAR.
This report is filed electronically with the Financial Crimes Enforcement Network (FinCEN), the anti-money laundering agency of the U.S. Department of the Treasury.
An FBAR must be filed when the aggregate maximum value of all foreign financial accounts exceeds $10,000 at any point during the calendar year, even for a single day.
For example, consider an individual who holds a checking account containing €7,000 and a savings account containing €5,000.
Although neither account individually exceeds the reporting threshold, their combined value does. Consequently, the individual must file an FBAR reporting both accounts.
FATCA: When Banks Report Information to the IRS
The third pillar is the Foreign Account Tax Compliance Act (FATCA), enacted in 2010.
FATCA operates on two levels.
First, it requires taxpayers to disclose certain foreign financial assets on Form 8938, attached to Form 1040, when their value exceeds thresholds higher than those applicable to the FBAR.
For a single taxpayer residing abroad, these thresholds are $200,000 on the last day of the tax year or $300,000 at any point during the year.
Second, and perhaps more significantly, FATCA requires banks and financial institutions worldwide to identify U.S. clients and report relevant financial information.
Italy entered into an intergovernmental agreement with the United States, ratified through Italian Law No. 95 of 2015.
Under this agreement, Italian banks transmit information about U.S. account holders to the Italian Revenue Agency (Agenzia delle Entrate), which subsequently forwards it to the IRS.
This explains why banks ask new customers about their place of birth and whether they hold U.S. citizenship.
A U.S. place of birth frequently triggers requests for additional documentation, including a U.S. taxpayer identification number, such as a Social Security Number (SSN) or Taxpayer Identification Number (TIN).
There have also been cases in which U.S. citizens residing in Europe have been denied bank accounts, mortgages, or investment products because financial institutions preferred to avoid the administrative burdens associated with FATCA compliance.
3. Comparison with Italy and Europe: Residence Versus Citizenship
The difference between the American and Italian tax systems is fundamental.
In Italy, as in nearly all European countries and most countries worldwide, tax liability is primarily determined by tax residence rather than citizenship.
Under Article 2 of the Italian Consolidated Income Tax Act (Testo Unico delle Imposte sui Redditi, or TUIR), as amended by Legislative Decree No. 209 of 2023, an individual is considered an Italian tax resident if, for the greater part of the tax year (183 days, or 184 days in a leap year), they meet the applicable residence, domicile, registration, or physical-presence criteria.
For these purposes, domicile refers to the place where an individual’s personal and family relationships are primarily centered.
Italian tax residents are generally taxed on their worldwide income, whereas nonresidents are taxed only on income sourced in Italy.
An Italian citizen who permanently relocates to London and registers with AIRE (the Registry of Italians Residing Abroad) will generally cease to be subject to Italian taxation on foreign-source income, provided the applicable tax residence requirements are satisfied.
By contrast, an American citizen who relocates to Milan remains subject to U.S. tax reporting obligations while potentially becoming an Italian taxpayer as well.
| Aspect | United States | Italy |
| Primary basis of taxation | Citizenship (and green card status) | Tax residence |
| Moving abroad | U.S. tax reporting obligations generally continue | Foreign income generally falls outside Italian taxation once nonresident |
| Income subject to taxation | Worldwide income | Worldwide income for residents; Italian-source income for nonresidents |
| Leaving the tax system | Generally requires relinquishing U.S. citizenship | Generally requires changing tax residence |
4. Practical Implications
Double Taxation and the Italy–U.S. Tax Treaty
Double taxation arises when two countries claim the right to tax the same income.
To mitigate this issue, Italy and the United States signed a double taxation treaty in 1999, which entered into force in 2009.
The treaty establishes rules for allocating taxing rights between the two countries for different categories of income and provides mechanisms for relief from double taxation, including foreign tax credits.
However, there is an important limitation: the so-called saving clause.
This clause, found in most U.S. tax treaties, generally preserves the United States’ right to tax its citizens as though the treaty did not exist, subject to certain exceptions.
In practical terms, the treaty can reduce double taxation through available tax credits, but it does not eliminate the obligation to file U.S. tax returns.
5. Renouncing U.S. Citizenship: The Only Definitive Exit
Because U.S. tax obligations are tied to citizenship, the only definitive way for a U.S. citizen to end citizenship-based taxation is to relinquish that citizenship.
Simply moving abroad, allowing a U.S. passport to expire, or avoiding travel to the United States for decades does not terminate these obligations.
The Procedure
1. Bring Tax Affairs into Compliance
To avoid being classified as a covered expatriate, an individual must certify compliance with U.S. federal tax obligations for the five preceding tax years.
Depending on the circumstances, this may involve procedures such as the Streamlined Filing Compliance Procedures or the Relief Procedures for Certain Former Citizens.
2. Schedule a Consular Appointment
The individual must arrange an appointment at a U.S. embassy or consulate, such as the U.S. Embassy in Rome or the U.S. Consulate General in Milan.
They must appear in person before a U.S. consular officer.
3. Complete the Renunciation Documentation
The individual must sign the Oath of Renunciation (Form DS-4080) and the accompanying Statement of Understanding (Form DS-4081).
A consular fee must also be paid. For several years, this fee has been $2,350, although the U.S. Department of State has considered proposals to reduce it.
The applicable fee should be verified at the time of the application.
4. Obtain the Certificate of Loss of Nationality
Following approval of the renunciation, the individual receives a Certificate of Loss of Nationality (CLN), formally documenting the loss of U.S. citizenship.
5. File Form 8854 with the IRS
The individual must submit Form 8854 (Initial and Annual Expatriation Statement), together with the applicable final U.S. income tax return for the year of expatriation.
The Exit Tax
Individuals who renounce U.S. citizenship may become subject to the Exit Tax, an expatriation tax that generally treats certain assets as though they had been sold at fair market value on the day before expatriation.
Unrealized capital gains exceeding an annually adjusted exclusion amount may become taxable. For 2025, the exclusion amount is approximately $890,000.
The Exit Tax generally applies to individuals classified as covered expatriates.
A person may fall into this category if at least one of the following conditions is met:
- Net Worth Test: Worldwide net worth equals or exceeds $2 million.
- Average Annual Tax Liability Test: Average annual U.S. income tax liability over the preceding five years exceeds an annually adjusted threshold (approximately $206,000 for 2025).
- Tax Compliance Certification Test: The individual fails to certify, on Form 8854, compliance with applicable U.S. federal tax obligations for the preceding five years.
Renouncing citizenship is a serious and generally irreversible decision that must be carefully considered.
It entails losing the unrestricted right to live and work in the United States.
Future entry into the country would generally require a visa or ESTA authorization, where eligible, under the rules applicable to foreign nationals.
Conclusion
Citizenship-based taxation is an unusual feature of the international tax landscape.
While most countries link tax obligations primarily to where individuals reside, the United States maintains a tax connection to its citizens regardless of where they live, potentially throughout their lifetime.
For individuals born in the United States or those with an American parent, the practical advice is straightforward: do not ignore the issue.
It is advisable to review one’s tax status with a professional experienced in international taxation, assess whether past filing obligations need to be brought into compliance, and only then make an informed decision about whether to retain or relinquish U.S. citizenship.