Understanding US Tax for Expats Living in Spain

Spain is a popular location for US expats, as its nice climate and opportunities are a draw for many foreigners. If you’ve considered a big move to Spain, you’ll want to consider how the implications will affect your US expat taxes and also understand the ins and outs of how Spain taxes those living in the country.

Things to Know About Expat Taxes in Spain

If you’re a citizen or permanent resident of the US, you must file a US tax return each year, no matter what country you happen to live in at the time. While the US taxes the international income of all citizens and permanent residents who live overseas, fortunately, it does provide several provisions to help protect you from double taxation on your US tax for expats. These include:

• The Foreign Earned Income Exclusion, which allows you to exclude up to $105,900 of foreign earned income from your 2019 US taxes and $107,600 from your 2020 US taxes,
• The Foreign Tax Credit, which allows you to offset the taxes you paid in your host country with your US expat taxes dollar for dollar, and
• The Foreign Housing Exclusion, which allows you to exclude certain household expenses that occur as a result of living abroad.

Note that in addition to your US tax for expats, you may also be required to file an informational return on your assets held in foreign financial accounts called a Foreign Bank Account Report (FBAR), otherwise known as FinCEN Form 114.

By planning ahead, you should be able to take advantage of the strategies above in order to minimize or eliminate your US tax obligation. To learn more about these tax savings and other tips, download a US expat tax guide.

Residency in Spain

In order to be considered a resident of Spain for tax purposes, you must meet the following requirements determined by Spanish domestic legislation:

• An individual is present in Spain for more than 183 days during a calendar year. If there are sporadic absences, the individual must prove that he or she is a tax resident elsewhere. (Note that temporary visits to Spain in order to comply with contractual obligations under cultural and humanitarian collaboration agreements with the Spanish authorities which are not remunerated are not included when calculating the 183-day residence period.)
• 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 Spain

Non-residents are generally taxed at 24%. If you’re a tax resident of Spain, your worldwide income will be subject to personal income tax at a progressive rates, which vary by region. The highest rates in Spain peak at 49% in the Cataluñu and Andalucía regions.  Each region will have slightly different rates. For instance, here are the rates for the residents of the Madrid region.

However, the different regions can alter the statutory rates, though Spain does impose property taxes at varying levels.

Capital Gains Tax in Spain

Up to 6,000 Euros, capital gains are taxed at 19%. Gains of 6,000 to 50,000 Euros and above are taxed at a rate of 21%. Gains of 50,000 and above are taxed at 23%. Gains for non-residents are taxed at 19%.

Spanish Tax Deductions and Credits

There are a number of deductions Spanish tax residents are eligible for, including:

• Tax credits for investments in principal residence
• Foreign tax credits
• Business activities
• Business savings accounts
• Maternity leave

Also, Spain offers a special tax regime for expats who are on a temporary assignment in the country. In order to take advantage of it, you must meet specific requirements, but it allows expats the opportunity to opt out of the progressive tax rate (flat rate of 24%), as well as avoid paying taxes on foreign sourced income.

Tax Treaty Between the US and Spain

There is a tax treaty in place between the US and Spain, which helps determine to which country different types of US tax for expats should be paid and at what point they should be paid. The purpose of the treaty is to ensure taxes are paid to the right country. Navigating the treaty on your own can be a bit complicated, so it’s a good idea to consult with an expat tax professional if you’re unsure of the requirements for your situation.

Tax Due Date in Spain

The tax year in Spain follows the same timeline as the US, from January 1 to December 31. Tax returns must be filed with the Agencia Tributaria between April 6 and June 30 of the year following the tax year. There are no extensions on filing tax returns in Spain. You have the option to pay all of your taxes when your tax return is due, or you can pay 60% then and complete the other 40% payment by the end of November.

How Social Security Works in Spain

As a foreign employee in Spain, you’ll be required to pay into social security unless you have a certificate of coverage through your home country that states you’re still making contributions. If you’re a resident of Spain, your mandatory contributions are tax-deductible, but that is not the case if you’re a non-resident.

There is a US – Spain Totalization Agreement in place, which helps explain which country should be paid social security based on residency status, duration of time spent in the US or Spain and whether or not you were hired by a US or Spanish company at home or abroad.

Taxation of Foreign Income in Spain

If you’re not a tax resident of Spain, you’ll only be taxed on your income from Spanish sources. If you’re a Spanish tax resident, you must report your worldwide income. However, up to 60,100 EUR of earned income for work performed outside of Spain can be excluded if certain conditions are met.

Other Taxes in Spain

There are a few other forms of taxation in Spain, aside from income taxes. These include:

• Value Added Tax (VAT) – This is a 21% tax applied to consumer goods, while the VAT on essential goods (such as food, water, medicine) is reduced to 10%. Some items are reduced even further, to 4%.
• Wealth Tax – This applies to assets above 700,000 EUR, with an additional 300,000 EUR allowed for a home. Inheritance tax will be dealt with on a regional level, and depends on where the taxable event took place.
• Property Tax – This will be identified based on the region and municipality in which you’re living. Motor vehicle taxes also will be assigned based on the city in which the vehicle is registered.

Overall, the Spanish tax system isn’t drastically different than that of the US, which may make the process less overwhelming for you as a US expat. In any event, it’s always a good idea to consult with an expat tax professional to discuss your specific US tax for expats situation. This will help ensure you don’t miss out on any savings opportunities when it comes time to file your US tax for expats.

Just Moved Abroad and Need Help Understanding Your US Tax for Expats Obligations?

Our team of expat-expert CPAs and IRS Enrolled Agents are here to provide you with the knowledge and resources you need in order to fulfill your tax obligations with the IRS. Contact us today!