Americans living in Spain enjoy many benefits, including a great quality of life, fascinating culture, and the ability to easily explore the rest of Europe, too.
It’s important to be aware of your US tax and reporting obligations though, which, in common with all American citizens living overseas, can be quite complicated and burdensome.
This is because as well as having to file Spanish taxes as a resident in Spain, all US citizens have to file a US federal tax return every year too, as required by US law.
There was once a time when the IRS had no way of knowing whether US citizens abroad should be filing, but in today’s age of international digital online banking and inter-governmental information sharing agreements, Uncle Sam now has global reach.
In this article, we provide a general overview to US tax and reporting for Americans living in Spain, however you should always consult a US expat tax specialist to ensure that you file in your best interests.
- Reporting your income
- Reporting your financial accounts and assets
- Other US reporting requirements for expats in Spain
- Avoiding double taxation and penalties
- Avoiding double social security taxation
- IRS amnesties
Reporting your income
US expats in Spain have to file IRS Form 1040 every year to report their worldwide income. It doesn’t matter whether you’re employed by a US company or a Spanish company, or if you’re self-employed, or own your own company, or receive passive income from a pension, dividends or rent for example: you still have to report your total worldwide income to the IRS each year, converted into US dollar values.
Note that expats get an automatic filing extension until June 15th, and they can request a further extension until October 15th if they need more time.
Reporting your financial accounts and assets
Americans living in Spain may also have to report their Spanish (and any other non-US) financial accounts and assets each year. There are two separate reporting requirements relating to offshore accounts and assets, known as FBAR and FATCA reporting.
An FBAR is a Foreign Bank Account Report. The requirement is for any American who has over $10,000 in total in foreign bank or investment accounts at any time in a year – even if only for a few seconds! So if for example you had maximum balances in a year of $5,000 in savings, and $3,000 in a brokerage account, and $2,001 in a pension account, with all the accounts registered outside the US, you would have to file an FBAR.
You also have to include in your calculations any business accounts or other accounts that you have signatory authority over even if they aren’t registered in your name.
Another example is if you don’t normally have over $10,000 in a Spanish bank account but you transferred a larger sum into it to buy a car or real estate for example, that might only take your balance over $10,000 for a few minutes in the year before you transfer the money out again. In this scenario, you would still have to file an FBAR.
FBARs are just a reporting requirement, so no additional tax is payable resulting from FBAR filing. FBARs should be file# financial crimes authority, by October 15th.
FATCA reporting has a higher minimum threshold, and is to the IRS. You have to file IRS Form 8938 with Form 1040 to report your overseas assets if you have over $200,000 in foreign financial assets at the end of the year, or over $300,000 at any time in the year.
The last reporting requirement to be aware of relating to overseas investments is Form 8621 if you invest in a non-US mutual fund. It’s a complex form, and there are also US tax implications, so these investments are normally best avoided. Always consult with your expat financial advisor in Spain if you’re not sure whether an investment will trigger new US taxes or reporting.
Other US reporting requirements for expats in Spain
Some expats in Spain have further US reporting requirements. These can include if you own (or have a significant share in) a company registered in Spain, including partnerships. Foreign company and partnership reporting can be onerous, so consult with your expat financial and tax advisors before setting up a company abroad, if possible, to ensure you set up your business in the most tax efficient way.
The last US reporting requirement to be aware of is a US state tax return. This will only be the case if you’ve retained ties to a US state such as owning real estate and keeping financial accounts open, or having dependents there, and also depending on the rules in that state.
Avoiding double taxation and penalties
Good news: when you file your US tax return as an expat living in Spain, you can claim one of two measures that mean you won’t have to pay US tax. These are claiming either the US Foreign Tax Credit, or the US Foreign Earned Income Exclusion.
The Foreign Earned Income Exclusion is claimed by filing Form 2555. It lets you exclude the first $112,000 (in 2022, or $120,000 in 2023) of your earned income from US tax. However, assuming that you’re liable to pay Spanish taxes, it often makes more sense to claim the Foreign Tax Credit by filing For 1116.
This is because the FEIE has a lot of qualifying rules, and because Spanish tax rates are higher than US rates. So by claiming the Foreign Tax Credit, which gives you US tax credits based on the value of Spanish taxes you’ve paid, you will normally reduce your US tax bill to zero and also have excess US tax credits that you can carry back or forward to past or future years. If you claim the Foreign Tax Credit, you can also claim the refundable Child Tax Credit, if you have qualifying dependent children living with you, which you will receive in the form of a US tax refund. This isn’t normally possible if you claim the FEIE though, and neither can you normally contribute to a US IRA plan, which you can if you claim the Foreign Tax Credit.
Whether it’s better to claim the FEIE or the Foreign Tax Credit will depend on your circumstances though, so you should always consult with a US expat tax specialist.
So most Americans living in Spain won’t have to pay US taxes as long as they invest and set up businesses based on specialist advice, do their US reporting correctly, and claim the Foreign Tax Credit. However, if you don’t file and report correctly, you could find yourself on the hook for large non-reporting penalties.
Avoiding double social security taxation
Americans living abroad who are self-employed or employed by a US company are liable to pay US social security taxes, however this raises the possibility of paying social security taxes twice, to both the US and to Spain. Fortunately though, a treaty called a Totalization Agreement between Spain and the US means you can avoid double social security taxation, with contributions in either country counting towards your entitlement to receive social security payments in the country where you retire. Consult your expat tax professional for further details.
IRS amnesties
If you’ve been living in Spain for a while but not filing a US tax return because you didn’t know about the requirement to file US taxes from abroad for US citizens, you can catch up without facing penalties (and still claim the Foreign Tax Credit) under an IRS amnesty program called the IRS Streamlined Procedures, as long as the IRS hasn’t contacted you about it yet. Consult an expat tax specialist for further details.
Other amnesty programs are also available for certain situations, such as if you have filed your US taxes but not FBARs, for example.
In conclusion, while US reporting rules for expats in Spain can seem burdensome, with specialist expat tax and financial planning advice, most expats don’t end up owing Uncle Sam any tax or have any issues.
If you have any questions about financial planning as an American living in Spain, get in touch.
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.
