US and Spanish Taxes for Americans in Spain
Information about filing taxes for Americans in Spain, including filing Spanish taxes, filing US taxes, tax rates, special tax rates, income credits, residency determination and typical scenarios.
Americans must file a US tax return, regardless of where they live.
If you have fallen in love with this beautiful country, rich with Mediterranean flavor, unique traditions and exciting nightlife, you aren’t alone! Spain has been a popular expat destination for many years and the numbers of Americans choosing to live in Spain continues to grow. But moving to Spain doesn’t relieve you of your US tax responsibilities. So we have compiled the most important things to know about filing US and Spain taxes as an American in Spain.
US Tax Filing Requirements
All US citizens
are required to report their worldwide income, regardless of where they live. Since most countries tax their residents, you may be concerned about dual-taxation. However, the US has put a number of exclusions in place to help offset your US tax liability. Let’s take a closer look at the exclusions that can help reduce, or even eliminate, your US expat taxes, as well as your other tax filing obligations.
Foreign Earned Income Exclusion
This is the most common way expats reduce their US tax liability. Eligible US expats can exclude the first $107,600 (2020) for singles – or $215,200 for married tax filers – of foreign earned income from US taxation. You must qualify for this exclusion by passing one of two residency tests: the Physical Presence test or the Bona Fide Residence test.
Under the Physical Presence test
, you must be physically present in a foreign country for 330 of any 365-day period. This means you’re allowed to travel back to the US occasionally and still qualify—so long as you spend 330 full days in a foreign country in the 365-day time period. Note that time spent in the air or by sea traveling to and from the US does not count towards the 330 day total, so it’s important to track your time carefully!
The Bona Fide Residence test
requires you to be outside the US for at least one calendar year and have no immediate intentions of returning to the US permanently. So overseas contractors and employees on short-term assignments won’t qualify, as the IRS assumes they will be returning to the US at the conclusion of their contract.
Foreign Tax Credit
This is a great way for expats who don’t qualify for the Foreign Earned Income Exclusion or those living in high-tax countries to reduce their US taxes. This is a dollar-for-dollar credit on the taxes you pay to a foreign country.
If you earn more than the Foreign Earned Income Exclusion, you can offset the taxes you paid on the remaining income—remembering that you can’t exclude the foreign taxes paid on the income you already excluded. That would be double-dipping in the eyes of the IRS.
Again, if you live in a high tax country, it may actually be more beneficial to simply use the Foreign Tax Credit by itself to offset all your US taxes.
FBAR (Foreign Bank Account Report)
FBAR must be filed if the balance of your foreign bank account(s) total $10,000 or more at any point during the tax year. Even if the balance hit $10,000 for one day (or one minute!), FBAR must be filed.
FBAR is filed electronically through the BSA e-filing system and must be done by June 30 each year—there are no extensions available, so pay close attention to this date! Penalties for failing to file FBAR when required can be steep—and violations determined to be ‘willful’ warrant even higher penalties.
FATCA (Foreign Account Tax Compliance Act)
FATCA is part of a US initiative to thwart tax cheats hiding assets in offshore accounts. Beginning in 2014, individuals are required to report the value of certain foreign financial assets if they exceed the reporting threshold. In addition, foreign financial institutions are now required to report on the accounts of their American clients. So if you choose not to disclose your assets, your bank probably will!
Form 8938 must be filed if your assets exceed these thresholds:
- Single filer: $200,000 on the last day of the year or $300,000 at any point during the year
- Married filing jointly: $400,000 on the last day of the year or $600,000 at any point during the year
- Like FBAR, penalties for not filing FATCA when required can be steep. Form 8938 is filed along with your US tax return, and any extensions you file for apply to this form, as well.
Americans in Spain can avoid dual-taxation with US exclusions and credits.
Spain Tax Filing Requirements
Now that we’ve gotten your US tax filing obligations out of the way, what are Spain’s tax laws and requirements?
Who is a Resident of Spain?
Residency is critical to how you are taxed in Spain. The Spanish domestic legislation determines residency by the following requirements:
- An individual is present in Spain for more than 183 days during a calendar year. If you travel to another country frequently (i.e. extended absences), you will still be considered a resident unless you can prove that you are a tax resident elsewhere. If you are still tax resident in the US, you may be able to prove this to Spain in order to preclude tax residency in Spain using form 6166. This is a potentially complicated but valuable tool to prevent tax liability for US expats in Spain and should be pursued with a tax expert like our friends at Strong Abogados.
- An individual has business or economic interests in Spain.
- An individual’s spouse and/or underage children are Spanish tax residents (unless another tax home is proven).
Income Tax Rates
In 2015, Spanish tax residents actually see their tax rates reduced, with further reductions expected from 2016.
General income tax rates:
up to EUR
|Tax rate in 2015
|Tax rate from 2016 onwards
Non-residents are taxed at a flat 24%.
Savings and Capital Gains Tax Rates
Savings tax rates are reduced slightly and capital gains are now taxed the same as your savings. For 2015 and 2016, the rates are:
|Savings (Investment income and capital gains) rate bands
up to EUR
|Tax rate in 2015
|Tax rate from 2016 onwards
Deductions available to residents
There are deductions that Spanish tax residents are eligible for, which help reduce taxable income:
- Tax credits for investments in principal residence
- Business activities
- Foreign tax credits
- Business savings accounts
- Maternity leave
Spain does offer a special tax regime for expats on assignment in Spain. You are required to meet specific requirements to qualify, but it can be a tremendous tax savings. Under this tax regime, expats can continue as a non-resident and pay the 24% flat tax rate for all Spanish income sources (and you will not be taxed on your worldwide income).
Note: You’ll need to choose this regime within six months from the start date of your Social Security registration. The period of time you can claim this expat tax rate starts from the first year when the expat has spent more than 183 days in Spain and continues for a total of five years or more.
US – Spain Tax Treaty
The US and Spain have a tax treaty in place, which is is an expat’s guide to ensuring that taxes are paid to the right country. If you are unsure of the wording of the treaty or have any questions, be sure to talk to a tax advisor to ensure the correct taxes are paid to the correct country.
Spain Tax Due Date
The tax year in Spain is the same as in the US: January 1 to December 31. Your tax returns must be filed with the Agencia Tributaria between May 1st and June 30th the following year (no extensions are available). Payments can be made when the return is filed, or you can pay 60% with the return and the remainder by the end of November.
Social Security in Spain
As with many countries, Spain does require you to pay into their Social Security unless you have proof that you are continuing to make contributions to your home country. If you are a resident of Spain, your mandatory contributions are tax deductible. If you are a non-resident (or under the special tax regime), contributions are not deductible.
However, the US - Spain Totalization Agreement explains which country should be paid Social Security. The determining factors are residence status, duration of time spent in Spain or the US, and whether or not you were hired by a US or Spanish company at home or abroad.
Is Foreign Income Taxed in Spain?
Tax residents are required to report worldwide income, but non-residents are only taxed on their Spanish income.
Other Taxes in Spain
The current VAT rate is 21% which apply to all goods who are not the reduced rates or exempt. Two different lower rates apply of 10% and 4%. The 10% rate apply on most drinks, hotels and cultural events, while the 4% rate applies to food, books and medicine. There is no wealth tax in Spain.
There are property taxes in place in Spain which are based on the region and municipality in which a taxpayer is living. Motor vehicle taxes are assigned based on the city in which the vehicle is registered.
It’s always helpful to see the expat tax laws ‘in action’ so let’s go through a few ‘real-world’ examples! Please note that all scenarios are just for example. Each person’s individual tax situation will be different.
Scenario #1: Expat working for US-based company via the Internet who makes $125K USD living in Spain
You earn $125,000 as an employee of an internet consulting company. The company pays you through your US bank account, and you transfer the money to your Spanish bank monthly. You work only in Spain and only return to the USA for vacations (no work). You live in Spain the entire calendar year, and you pay taxes to Spain on your US sourced income.
Important notes: All wages* earned outside the USA are considered foreign earned income. If you return to the USA and work, even for one day, that income is not considered foreign earned income.
Here is a basic configuration on how your US taxes will be figured:
Less $99,200 Foreign Earned Income Exclusion
= $25,800 total income
Less standard deduction and personal exemption(s)
= Taxable income
If you have taxable income, you will have tax on that income in the USA. You can then use the Foreign Tax Credit to reduce that tax, based on the taxes you pay to Spain on the same income. Remember that you cannot use the Foreign Tax Credit to offset taxes on income you excluded with the Foreign Earned Income Exclusion.
*Wages are considered to be income earned while in the employ of another individual or company.
Scenario #2: Expat working as an English teacher in Spain making €20,000
You are a US expat (US Person) living in Spain and working for a Spanish School teaching English. You work only in Spain and make €20,000 for the year, paying taxes in Spain on your income. You have lived and worked in Spain for the whole calendar year and have only returned to the USA for vacations (no work).
Here is a basic configuration of how your taxes will be figured:
€20,000 converted to USD using the US Treasury Yearly Average exchange rate for 2014 = $25,510 (rounded)
Less $25,510 Foreign earned income exclusion
= No taxable income in the USA
You will still need to file a tax return to declare your income to the IRS, even though you clearly won’t owe any taxes. You must show how you qualify to use the Foreign Earned Income Exclusion, as qualification isn’t automatic.
Scenario #3: US expat working as an entrepreneur in Spain and also travels around the world
You earn a total of $100,000 (net of expenses) in various business ventures throughout the year. We are assuming these ventures are all considered self- employment (and not investment activities) through services rendered or products sold. Only part of your income is considered Spanish income for Spain tax purposes because you are only physically working in Spain for 6 months of the year, and you are not covered under the Spanish social security system.
You spend time in the USA and earn $10,000 while you are there—since this isn’t foreign earned income it cannot be excluded from US taxes. In addition, you spend less than 35 days within the USA (including travel to and from the USA) during the calendar year.
Here’s how your taxes are calculated:
$100,000 Net income reported on a Schedule C , Form 1040
Less $90,000 Foreign Earned Income Exclusion ($100,000 - $10,000 income earned in USA = $90,000)
= $10,000 Total income
Minus standard deduction + exemption(s) = Total taxable income.
If you have any taxable income, you will have income tax. However, any taxes you pay to a foreign country may be used as a Foreign Tax Credit to offset any USA income tax on the taxable income.
Since you are not covered by the Spanish social security system, you have to pay SE taxes on your income to the USA. This 15.3% tax is levied on the $100,000 net income (approximately $15,000). This is your Social Security and Medicare taxes and cannot be offset by any Foreign Tax Credit. This tax only applies to your self-employment income, not to any other income on your return such as interest, dividends, rental income, etc.
Note: If you don’t meet the 35 day requirement in the USA (i.e. you are in the USA for longer than 35 days in the calendar year), your Foreign Earned Income Exclusion will be lower and possibly eliminated, depending upon your total days during the year and in previous and subsequent calendar years.
Scenario #4: Expat living on retirement income from the USA
You are living in Spain and only have income from a retirement account and US Social Security. You don’t pay taxes to Spain on the income.
You will figure and pay taxes to the USA on your income as you would if you were living in the USA. Your income does not qualify for the Foreign Earned Income Exclusion, as it’s considered passive income (not earned). You don’t pay taxes to Spain on your income, so there are no Foreign Tax Credits to use.
If you pay taxes to Spain on your income, you can use those taxes as a credit on your US tax return to reduce your US taxes figured.
What are some easy ways to ensure one doesn’t tick certain boxes that cause big problems?
Avoiding a bank account having more than $10,000!
Some of the most common errors on an expat tax return are:
What about the 35 day per year tax rate?
- Not declaring the ownership of non-US bank accounts on the Schedule B, Part III. (This section needs to be filled out even if the aggregate total of your accounts does not reach $10,000.)
- Not taking into consideration the travel dates to and from the USA when figuring your USA travel dates for the Foreign Earned Income Exclusion.
- If you are married to a non-US person, you cannot file using the Single filing status. You will need to file as Married Filing Separately. You may also qualify for the Head of Household filing status if you provide more than half the support of a dependent child (with a Social Security number) and your spouse is a non-US person.
- US persons (Citizens or permanent residents –Green card holders) need to file using Form 1040, 1040A, or 1040EZ; they cannot use form 1040NR.
- There are different filing requirements for FATCA Form 8938. The requirements are based upon your filing status and the form is required to be filed with your tax return.
- Even though US expats living outside the country get an automatic 2 month extension to file their tax return (to June 15th), they have to declare that they are using the extension in a statement on their return. This is especially important if you owe taxes to the IRS.
- The FBAR $10,000 balance requirement applies to the total balance of all your foreign bank/financial accounts including those held jointly with a spouse or other person. Other accounts that count towards the total are certain retirement accounts and foreign investment accounts.
A big misconception is that the 35 day rule doesn’t apply to people living in a foreign country for more than a calendar year. This is not necessarily true. A person can avoid the 35 day rule if they are considered a bona fide resident of a country, which is ultimately determined by the IRS. The IRS judges your intent to stay abroad and looks at your living situation – Are you living in housing that is available to the general public? Does your family live with you? Are you living in the country only because of a work contract? Do you intend to return to the USA in the near future, or when your work contract expires?
So if you don’t qualify for the Bona Fide resident test, here are some tips to help you reduce your dates in the USA:
This post was written by David McKeegan, co-founder of Greenback Expat Tax Services. Greenback specializes in the preparation of US expat taxes for Americans living abroad. If you’d like Greenback to prepare your individual US expat tax return, simply click here to get started. For more information about Greenback Expat Tax Services or your US expat tax obligations, please contact us or visit [url=http://www.greenbacktaxservices.com]http://www.greenbacktaxservices.com[/url].
- Vacation outside the USA – This is a good time to travel the world! Take your family along with you. You can spend time with your family and explore a new area without impacting your ability to qualify for the Foreign Earned Income Exclusion.
- Make the most of your travel dates – The days you travel into and out of the USA are considered days you are in the USA. (As the 330 days refers to 330 full days within a foreign country) Consider taking longer vacations in the USA rather than a lot of short trips.
- Business travel counts towards your 35 day total – Try to extend business travel to include some personal/vacation days to maximize the time in the USA. This will save you the dates of in/out travel that will count against your total days.