Retiring in Southern Italy after giving up a U.S. green card: what really happens to your Social Security, pensions, and investments

Southern Italy keeps calling—slow mornings in Puglia, afternoon passeggiate in Calabria, a simpler pace that’s hard to resist. For many long-time U.S. residents with green cards, that call now pairs with a compelling tax angle: Italy’s “7% flat tax” for foreign pensioners who relocate to qualifying towns in the Mezzogiorno. If you plan to abandon your U.S. green card, settle in the South, and live on U.S. Social Security, retirement plans (401(k), IRA, annuities), and portfolio income, here’s a crisp, practical roadmap—what gets taxed where, and how to avoid double tax and leakage.

This article is general information, not legal or tax advice. Cross-border retirements are facts-and-documents sensitive; get individualized guidance.

1) First move: exiting the U.S. tax net the right way

When you give up a green card, U.S. tax treatment turns on whether you were a “long-term resident” and whether you become a “covered expatriate.” Long-term residents (generally, green card in 8 of the prior 15 tax years, counting any day in a year as a year unless you filed as treaty-nonresident for that year) face the IRC §877A expatriation regime. Covered expatriates can be subject to a mark-to-market “exit tax,” plus special rules for deferred compensation (401(k), IRAs, pensions) and specified tax-deferred accounts. Planning well before you file your I-407 can materially change outcomes (e.g., basis step-ups, Roth/rollover sequencing, timing of distributions). (IRS, itaxa.it)

Key nuance if you are a covered expatriate: “eligible deferred compensation” (like many employer plans) is generally subject to 30% U.S. withholding on each payment, and obtaining that treatment requires filing Form W-8CE with the payer and irrevocably waiving treaty benefits for those items—this waiver directly affects how Italian taxation interacts with U.S. withholding. (itaxa.it)

2) Becoming an Italian tax resident and the 7% Southern Italy regime

If you receive a foreign pension and move to a qualifying small municipality (≤20,000 population) in Southern Italy (Sicilia, Calabria, Sardegna, Campania, Basilicata, Abruzzo, Molise, Puglia) or designated seismic-area towns, you may opt into Article 24-ter TUIR—the 7% substitutive tax on foreign-source income for nine tax years. Eligibility requires not being Italian tax resident in the preceding five years and moving from a jurisdiction with administrative cooperation (the U.S. qualifies). You exercise the option in your Italian tax return and then pay the 7% in one annual payment. (Agenzia delle Entrate, SISMA 2016)

Two crucial mechanics:

• The 7% is a substitute tax—it exhausts the Italian liability on qualifying foreign-source items while the option is in force. (Def Finanze)

• Because it’s a substitute levy (not ordinary IRPEF), foreign tax credits in Italy generally aren’t allowed against that 7% for those same items. In short: if the U.S. withholds at source, you can’t typically credit it in Italy under the 7% regime—so you want the right U.S. forms in place to minimize or eliminate U.S. withholding. (Agenzia delle Entrate)

3) Social Security: will it keep paying, and who taxes it?

Yes, your U.S. Social Security can keep paying you in Italy. The U.S.–Italy Totalization Agreement ensures continued payment while you reside in Italy, regardless of nationality. (Social Security) 

Who taxes it? The U.S.–Italy income tax treaty (Article 18(2)) assigns exclusive taxation of Social Security to the country of residence. Once you are an Italian resident (and no longer a U.S. citizen), Italy has the taxing right; the U.S. should not tax those benefits under the treaty. If you’re on the 7% regime, Social Security is generally treated as foreign-source income and falls into the 7% basket (subject to Italian sourcing rules and your facts). Without the 7% option, Social Security is taxed under ordinary Italian IRPEF. (U.S. Department of the Treasury)

4) Private pensions and annuities (401(k), IRA, employer pensions, annuities)

Treaty rule. Article 18(1) (pensions) and 18(4) (annuities) generally give exclusive taxing right to the State of residence—i.e., Italy once you are an Italian resident (again, assuming you’re not a U.S. citizen). Practically, that means you should reduce U.S. withholding to 0% by providing a properly completed Form W-8BEN to each U.S. payer, citing the U.S.–Italy treaty (Article 18). If you elect the 7% regime, those pension/annuity payments typically fall within the 7% foreign-source base; otherwise, they are taxed at ordinary Italian rates. (U.S. Department of the Treasury, IRS)

Important exceptions and planning traps:

• Lump sums/severance after a residence change. Article 18(3) allows the source country to tax certain lump-sum/severance-type payments even after you move; timing and characterization matter (e.g., a large post-move lump sum may face U.S. tax despite the general rule). Coordinate distribution timing before expatriation. (U.S. Department of the Treasury)

• Covered expatriate overlay. If you are a covered expatriate, the 877A framework changes the overlay on deferred compensation. To secure “eligible deferred compensation” treatment, you must file W-8CE and waive treaty benefits, which typically re-imposes 30% U.S. withholding on each payment—then Italy taxes the same payment (often at 7% if you elected it), with no Italian foreign tax credit against the 7%. That’s classic tax leakage unless you restructure before expatriation. (Agenzia delle Entrate)

5) U.S. investment income after you expatriate (dividends, interest, capital gains)

As a non-U.S. person resident in Italy, your portfolio income is split among three buckets:

Dividends. Under the treaty, U.S. source-country withholding on portfolio dividends paid to Italian residents is generally 15% (5% for certain substantial corporate holdings). File W-8BEN to claim the treaty rate at source, because the 7% regime won’t give you an Italian foreign tax credit for that U.S. withholding.

Interest. The treaty caps U.S. withholding on many interest payments at 10%. In practice, U.S. domestic law often reduces withholding to 0% under the portfolio interest exemption on qualifying debt—again claimed via W-8BEN. This combination (treaty + domestic exemptions) can reduce or eliminate U.S. leakage during your Italian 7% period.

Capital gains. For nonresidents, most U.S. capital gains are not taxed by the U.S. unless (i) they’re from U.S. real property interests/REIT look-through (FIRPTA) or (ii) you’re physically present in the U.S. >183 days in the year of sale. Italy then taxes the gains (7% regime if foreign-source and you elected it; otherwise ordinary Italian rules). (IRS)

6) How the 7% regime and the treaty fit together (and where leakage happens)

Think of Italy’s 7% regime as a low, flat Italian tax on foreign-source income—and the treaty as a traffic cop deciding which country may tax each item.

• Social Security / private pensions / annuities: The treaty mostly pushes taxation to Italy (your new residence), which aligns well with the 7% regime. The exception is certain lump sums (Art. 18(3)) and covered expatriate situations, where U.S. law re-asserts withholding and you can’t generally claim an Italian foreign tax credit against the 7%—so plan distributions and status before expatriation. (U.S. Department of the Treasury, Agenzia delle Entrate)

• Portfolio income: You want to eliminate or reduce U.S. withholding at source (W-8BEN and instrument selection) because the 7% regime doesn’t absorb U.S. withholding via credits. Favor interest that qualifies for 0% under domestic law, and be cautious with U.S. real-estate-heavy vehicles (REITs/USRPI look-through). (IRS)

7) A forward-looking glidepath: practical timeline and choices

6–12 months before filing I-407 (green-card abandonment):

• Status check. Will you be a long-term resident? If yes, model covered expatriate risk (net worth, average tax liability, compliance tests). Quantify potential 877A inclusion and deferred-compensation treatment. (IRS)

• Pension sequencing. Consider whether Roth conversions, partial rollovers, or annuitization before expatriation improve outcomes—especially if you would otherwise fall into the covered expatriate rules that force treaty waivers and 30% U.S. withholding going forward.

• Portfolio cleanup. Minimize prospective U.S. withholding during the 7% years: shift toward interest that qualifies for portfolio-interest exemption and away from structures with FIRPTA/REIT look-through risk.

At/after arrival in Italy:

• Choose your town carefully. Confirm population thresholds and qualifying regions; seismic-area alternatives may broaden choices beyond the South. File the 7% election in your first Italian return. (SISMA 2016, Agenzia delle Entrate)

• Paper the U.S. side. Provide W-8BEN to U.S. payers to claim treaty rates (dividends/interest) or 0% (pensions/annuities) unless you’re a covered expatriate subject to the 30% rule on eligible deferred comp. Align custodian coding before payments start to Italy. (IRS)

• Mind the credits. Under the 7% regime, don’t expect Italian foreign tax credits against that 7%. Prevent leakage by fixing U.S. withholding at source rather than hoping to credit it later in Italy. (Agenzia delle Entrate)

8) Quick case study (simplified)

You surrender your green card (not a covered expatriate), move to Lecce (qualifying town), elect the 7% regime, and your income is: $40k U.S. Social Security, $60k IRA distributions, $20k dividends, $10k interest.

• Social Security & IRA: Under the treaty, Italy taxes these; with the 7% regime, they’re typically in the 7% base. Ensure 0% U.S. withholding by timely filing W-8BEN with the pension/IRA custodian citing Article 18. (U.S. Department of the Treasury, IRS)

• Dividends: Treaty rate 15% unless the payer already coded you correctly. File W-8BEN to get 15% at source (or lower if applicable). Remember: no Italian credit under 7%, so any U.S. withholding is pure leakage—consider instrument selection (e.g., tilt toward interest). (Agenzia delle Entrate)

• Interest: Often 0% U.S. withholding if it qualifies as portfolio interest; confirm instrument type and file W-8BEN.

If, instead, you were a covered expatriate, your 401(k) could suffer 30% U.S. withholding on each payment (treaty waiver under 877A), and Italy would still tax (often at 7%)—a classic double-layer that needs pre-departure restructuring.

9) Bottom line

For former green-card holders who love the Mezzogiorno lifestyle, the treaty plus Italy’s 7% regime can be a powerful combo—if you choreograph the sequence. The big wins come from:

1. Avoiding covered-expatriate traps (or planning around them),

2. Claiming treaty outcomes at source (W-8BEN/W-8CE where applicable), and

3. Designing a portfolio that doesn’t bleed U.S. withholding you can’t credit against Italy’s 7%.

Do those three things, and your Social Security, pensions, and investments can support the very retirement you came for—espresso, sea breeze, and all.

Sources & key provisions

• U.S.–Italy Totalization: Continued payment of U.S. benefits while residing in Italy; SSA pamphlet. (Social Security)

• U.S.–Italy Income Tax Treaty (Technical Explanation): Article 18 (pensions, annuities, Social Security), Article 10 (dividends, 15%/5%), Article 11 (interest, 10%), Article 13 (capital gains/FIRPTA). (U.S. Department of the Treasury)

• Italy’s 7% regime (Art. 24-ter TUIR): scope, Southern Italy towns, nine-year duration, application mechanics. (Agenzia delle Entrate, SISMA 2016)

• No Italian foreign tax credit against the 7% substitute tax on foreign-source income. (Agenzia delle Entrate)

• Expatriation rules for former green-card holders: §877A overview and Notice 2009-85; Form W-8CE treaty waiver mechanics for deferred compensation. (IRS, itaxa.it)

• NRA portfolio basics (e.g., 183-day capital gains rule): IRS Publication 519. (IRS)