Taxes for Expats – The US – Spain Tax Treaty
The US – Spain tax treaty was originally signed in 1990, with an additional protocol signed in 2013 but only ratified in 2019 that reduced withholding taxes on dividends, interest and royalties, as well as increasing tax information sharing between the two countries.
The purpose of the treaty is to prevent double taxation for Americans living in Spain and Spanish citizens living in the US. The treaty doesn’t prevent American expats living in Spain from having to file US taxes, however.
Taxes for US expats in Spain
The US taxes based on citizenship, which means that all US citizens and green card holders, including US expats living in Spain, with worldwide income of over $12,200 a year (for 2019), or just $400 of self-employment income, are required to file a US tax return each year.
Spain on the other hand only requires Spanish residents to file Spanish taxes. An American living in Spain typically qualifies as a Spanish tax resident if they spend over 183 days in Spain in a year. For those who qualify, Spanish tax returns should be filed to the Agencia Tributaria by June 25th.
This leaves many US expats living in Spain having to file two tax returns, and also puts them at risk of double taxation.
Expats receive an automatic filing extension for their US taxes until June 15th, and they can request a further extension until October 15th if they need to, giving them plenty of time to file their Spanish taxes first (due by April 1st) .
US expats in Spain may also have to file a Foreign Bank Account Report (FBAR), if they have over $10,000 in total in non-US based bank, investment, and other financial accounts at any time during the year (including any accounts that they have signatory authority or control over, even if not registered in their name).
The United States – Spain Tax Treaty
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The United States – Spain Tax Treaty covers double taxation with regards to income tax and capital gains tax, however, the benefits are limited for most Americans expats living in Spain.
The treaty does ensure though that no one will pay more tax than the higher of the two countries’ tax rates, and it also defines where taxes should be paid, which normally depends on where the income arises.
The way the treaty allows US expats to avoid double taxation on their income in Spain is by allowing them to claim US tax credits when they file their US tax return up to the same value as Spanish income taxes that they’ve already paid.
Conversely, for income arising in the US, Americans in Spain can claim Spanish tax credits to offset the income taxes they’ve paid to the IRS.
To claim US foreign tax credits, expats must file Form 1116 when they file their federal tax return. In this way, because Spanish income tax rates are higher than US rates, most US expats in Spain won’t end up owing any US income tax.
Alternatively, expats in Spain can claim something called the Foreign Earned Income Exclusion by filing Form 2555, which simply allows them to exclude the first around $100,000 of their earned income from US taxation.
Whether it’s more beneficial to claim the Foreign Earned Income Exclusion or the Foreign Tax Credit depends on each expat’s circumstances, including their income levels and types, residency status, and where their income originates.
It’s possible in some circumstances to claim both the Foreign Earned Income Exclusion and the Foreign Tax Credit, although they can’t both be applied to the same income.
The US – Spain Tax Treaty also allows the Spanish government to provide US expats’ Spanish tax information to the IRS, as well as their Spanish bank and investment account details and balances.
Some Americans in Spain, for example students, trainees, and US government employees, may be able to claim a provision in the United States – Spain Tax Treaty besides claiming US tax credits. Expats should consult a US expat tax specialist to check. Expats who can claim a provision in the treaty can do so by filing IRS form 8833.
The US-Spain Totalization Agreement
A separate agreement called a Totalization Agreement helps US expats in Spain not to pay social security taxes to both the US and Spanish governments. Expats’ contributions made while in Spain can be credited to either system. Which country they pay depends on how long they will be living in Spain.
Expats in Spain who are behind with their US tax filing because they weren’t aware that they have to file from abroad can catch up without facing penalties under an IRS amnesty program called the Streamlined Procedure, so long as they do so voluntarily, before the IRS contacts them about it.