US Expat Taxes for Americans Living in Spain – What You Need to Know
There are an estimated 95,000 Americans living in Spain.
Living in Spain is an incredible experience for a variety of reasons – the culture, climate, food, and wine to name but a few. As an American expatriate living in Spain though, what exactly do you need to know regarding filing US expat (and Spanish) taxes?
All US citizens and green card holders are required to file a US federal tax return and pay taxes to the IRS, regardless of where in the world they live or their income is generated.
The good news is if you are paying income tax in Spain, there are various exclusions and exemptions available to claim to prevent you paying tax on the same income to the IRS too.
US taxes – what you need to know
If your annual income is more than $12,400 (in 2020, or $12.550 in 2021), or just $400 for self-employed individuals, or just $5 for Americans married filing separately with a foreigner, then you have to file form 1040. While any tax owed is still due on April 15th, expats get an automatic filing extension up until June 15th. This can be extended further until October 15th.
If you have foreign assets worth over US$200,000 (per person), excluding your home if it is owned in your own name, you also have to file form 8938 and declare them.
If you had a total of at least US$10,000 in one or more foreign accounts at any time during the tax year, you also have to file FinCEN form 114, otherwise known as a Foreign Bank Account Report or FBAR.
Thankfully, there are several ways in which Americans living in Spain can reduce their US tax bill (most often to zero). The two primary ones are the Foreign Earned Income Exclusion, which allows you to exclude the first around US$110,000 from US income tax if you can demonstrate that you are resident in Spain, and the Foreign Tax Credit, which gives you a dollar tax credit for every dollar of tax you’ve already paid in Spain.
“The Spanish system for direct taxation of individuals is mainly comprised of two personal income taxes: Spanish PIT, for individuals who are resident in Spain for tax purposes, and Spanish non-residents’ income tax (NRIT), for individuals who are not resident in Spain for tax purposes who obtain income in Spain.”
The Foreign Tax Credit is typically a better option if you pay more tax in Spain than you would owe in the US, as you can carry the excess tax credits forward for future use.
The United States – Spain Tax Treaty
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.
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.
Spanish taxes – what you need to know
Foreigners who spend more than 183 days a year in Spain, or for whom Spain is their main base or center of economic activities or interests, are considered resident for tax purposes. Expats who earn over 22,000 Euros a year from just one employer must file a Spanish tax return. Those who earn less, but from either more than one source, or not from employment (e.g. from rental income), also have to file a return. The Spanish filing deadline is June 30th, however if you wish to pay your tax by direct debit in installments you must file by June 25th.
There are several deductions available, including a personal deduction, a deduction for married couples, and for those with children.
The Spanish tax authority is called the Agencia Tributaria, and the tax return form is called Modelo 100.
Spanish residents must also declare assets outside Spain using form Modelo 720 if the assets have a combined total value of more than 50,000 Euros.
Spanish income tax rates are relatively high compared to in the US, so for many people it will make sense to claim the Foreign Tax Credit. Spanish income tax rates range from 19% to 45%.
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.
We strongly recommend that if you have any doubts or questions about your tax filing situation as a US expat living in Spain that you contact an expat tax specialist.