Spain is one of the top destinations for Americans living in Europe. There are between 40,000 and 50,000 Americans currently living in Spain. There are a lot of reasons why Americans move to Spain, with the most popular being for an employment opportunity, retirement, romance, and a digital nomad adventure. Spain has several tax incentives and visas available for Americans, which combined with a great climate, delicious cuisine, and excellent health, transport and education infrastructure, creates an amazing proposition for Americans looking to live abroad.
However, there are also lots of financial considerations for Americans living in Spain, including managing your investments and savings, and minimizing your tax bill. In this article, we’ll look at 5 essential financial planning strategies for US expats in Spain.
1. Budget and pay down debts
The first step to getting your financial life on track is to budget and pay down debts. Having debts can detract from your financial wellbeing in your life abroad, however the solution is to create a debt management strategy. Start by making a list of all your debts along with their corresponding interest rates.
Next, create a monthly budget showing your sources of income and your expenditure. Then, look for opportunities to reduce any unnecessary spending and increase your income.
When it comes to eliminating debt, one of the most effective tactics is to focus on paying off those with the highest interest rates first, such as your credit card balances. This is due to the fact that credit cards often have a higher rate of interest which results in a greater overall cost to you. As a rule of thumb, aim to pay off any debts with an interest rate higher than the net return you would realize if you invested rather than paid down debt.
2. Tax plan to avoid double taxation and minimize your tax bill
While the US – Spain Tax Treaty prohibits double taxation on taxable income and capital gains taxes, the benefits are restricted for the majority of American expats living in Spain as a clause in the treaty allows the US to tax its citizens as if the rest of the treaty didn’t apply. This means that the majority of the benefits apply just to Spaniards living in the US.
However, the treaty ensures that nobody will pay higher taxes than the greater of the two countries’ tax rates (normally the Spanish rate, although there are tax incentives to move to Spain).
The treaty also enables US expats in Spain to prevent double taxation on their income by enabling them to receive US tax credits equal to the amount of Spanish income taxes they have already paid. These tax credits must be claimed when you file your US tax return.
There are a variety of strategies that can help Americans living in Spain lower their tax liability in the United States. The two main ones are either by claiming the Foreign Tax Credit, as mentioned, on IRS Form 1116, which provides you with a dollar tax credit for each and every dollar of tax you’ve already paid in Spain, or by claiming the Foreign Earned Income Exclusion, which enables you to exclude the first US$120,000 (for 2023) of your earned income from United States income tax if you can demonstrate that you are living in Spain.
If you pay more taxes in Spain than you’d owe in the United States, the Foreign Tax Credit is often the best choice for you to make because it allows you to carry forward any surplus tax credits for use at a later date.
There are also other US tax reporting rules you need to know about, such as relating to reporting your Spanish bank and investment accounts each year, and reporting ownership of a non-US business. On the Spanish side, residents have to report non-Spanish assets on a form called Form 720, as well as pay a possible wealth tax on their worldwide assets, depending on which Spanish region you live in. As such, it’s always worth seeking professional advice to ensure that you both keep your tax bill to a minimum and avoid penalties for missed reporting.
3. Save for retirement
Many Americans move to Spain for retirement, however if you’re younger, saving for retirement should always be a financial planning priority. The golden rule with retirement saving is that the sooner you start, the more your contributions will have the opportunity to compound, so don’t put it off.
Have a conversation with your expat financial advisor regarding your retirement planning strategy. Ideally, you’ll build up multiple income streams or ‘pillars’, including a state pension (i.e. social security payments), a private tax advantaged retirement plan, and perhaps an employer plan.
4. Invest
Having paid down debts with high interest rates, minimized your tax bill and started saving for retirement, you should then think about investing your additional excess to start building your wealth. As an expat in Spain, there are lots of questions that come up, such as whether you should invest in Spain or in the US, as there may be limitations relating to US reporting and tax rules for investments in Spain (which might be considered PFICS), or EU rules when investing in the US (e.g. due to PRIIPS).
The first step should be to create a financial plan with your expat financial advisor, to set out your goals and risk aversion levels. Then, they can advise you what types of assets you should invest in and where. Ensure that you work with a financial advisor who is familiar with the particular challenges faced by Americans investors living in Spain.
Citizens of the United States (and anyone with a green card) are required to file tax returns and pay taxes in the United States no matter where they live in the world. When it comes to taxes, the rules in the United States make it difficult for a person living in the United States to hold some types of assets from other countries in their investment portfolio. In addition, the reporting of overseas funds for tax purposes in the United States is both time-consuming and costly. However, your financial and tax advisors will be able to advise you how to achieve your investment goals without raising US tax issues.
5. Seek specialist cross-border financial planning advice
As you’ve seen, there are plenty of both opportunities and pitfalls for Americans living in Spain. The key to avoiding the pitfalls and taking advantage of the opportunities to achieve your financial goals is good advice. Despite living in Spain, as a US citizen you’re still accountable to the IRS, which affects the way you should invest, along with other factors such as your financial circumstances and goals and future plans. Seeking advice from a financial advisor with expertise with US expats in Spain will not just bring structure and focus to your finances but potentially save you a lot of money.
Get in touch today to find out how we can help you to achieve your financial goals.
This article is for informational purposes only; it is not intended to offer advice or guidance on legal, tax, or investment matters. Such advice can be given only with full understanding of a person’s specific situation.
