Are you dreaming of sun-drenched beaches and vibrant culture? No wonder! The General Council of Notaries in Spain reports a 13% increase in the American expat population from 2019 to 2021, with home sales to Americans rising 88% from early 2019 to early 2022.
But, amidst the excitement of your Spanish move, have you considered the tax implications? This article explores into everything expats need to know about navigating the Spanish tax system, ensuring a smooth transition and maximizing your financial well-being.
Further reading: Are Moving Expenses Tax Deductible? Understanding Moving Expense Tax Deductions
Filing Taxes as a US Expat in Spain
What Tax Forms Do US Expats in Spain Need to File?
As a U.S. citizen or resident alien living in Spain, you need to file taxes in both countries. Here are the key tax forms you'll need:
- Form 1040: This is your standard US Individual Income Tax Return. It must include all your worldwide income, not just your income in Spain.
- Form 2555: Use this to claim the Foreign Earned Income Exclusion (FEIE), which lets you exclude up to $108,700 of foreign-earned income from US taxation.
- Form 8938: This form is for reporting specified foreign financial assets if they exceed certain thresholds.
- FBAR (FinCEN Form 114): If you have foreign bank accounts with a total value exceeding $10,000 at any point during the year, you need to report them here.
Filing these tax forms ensures you meet your tax obligations in both the US and Spain, helping to prevent tax issues and potential penalties. Don’t forget to include income in Spain when filing your US tax return to avoid double taxation.
How Do Tax Treaties and Totalization Agreements Affect You?
The U.S.-Spain tax treaty helps you avoid double taxation. It allows you to credit taxes paid in Spain against your U.S. tax liability. This is essential for US expats who earn income in Spain, as it means you won't pay taxes twice on the same income.
Also, the U.S.-Spain Totalization Agreement helps you avoid paying social security taxes in both countries. This agreement ensures that you only contribute to one country's social security system, simplifying your tax obligations and possibly lowering your total tax bill.
Income and Wealth Taxes for Expats Living in Spain
What Are the Income Tax Rates in Spain for U.S. Expats?
Here’s a quick overview of the 2024 income tax rates in Spain:
- 19% on income up to €12,450.
- 24% on income between €12,451 and €20,200.
- 30% on income between €20,201 and €35,200.
- 37% on income between €35,201 and €60,000.
- 45% on income over €60,000.
These rates apply to both residents and non-residents on their income in Spain. Understanding these rates helps you plan your finances and manage your tax liabilities effectively.
How Does the Wealth Tax Work for Expats?
The wealth tax in Spain is levied on the net value of your assets. For residents, this includes worldwide assets, while non-residents are taxed only on assets located in Spain. Each region sets its own rates and exemptions, but typically they range from 0.2% to 2.5%. Knowing how the wealth tax applies to you can help in planning and potentially minimizing your tax burden.
Avoiding Double Taxation and Utilizing Tax Reliefs
How Can Expats Avoid Double Taxation?
To avoid being taxed twice, you can utilize the Foreign Earned Income Exclusion (FEIE), which allows you to exclude up to $108,700 of your foreign-earned income from U.S. taxation (2024 limit). This exclusion can significantly reduce your US tax bill if you are earning income outside of Spain.
Also, you can claim the Foreign Tax Credit (FTC), which gives you a credit for the taxes you pay in Spain, helping to offset your U.S. tax bill. This is vital for expats who are tax residents in Spain, as it ensures you are not double taxed on the same income.
What Tax Reliefs Are Available for Expats in Spain?
Spain offers several tax reliefs that can help reduce your tax burden as a Spanish tax resident:
- Personal Allowances: These allowances depend on your family situation and the number of dependents you have. They can significantly reduce your taxable income, making your tax bill more manageable.
- Deductions for Pension Contributions: Contributions to both Spanish and qualifying foreign pension schemes can be deducted from your taxable income. This is beneficial if you are planning for retirement and want to reduce your tax bill now.
- Investment Deductions: Deductions are available for contributions to certain types of savings plans. This includes specific investment funds and savings accounts that encourage long-term financial planning.
- Capital Gains Tax: Spain also offers relief on capital gains tax under certain conditions, especially if the gains are reinvested in your primary residence or other specified assets.
Utilizing these tax reliefs can lower the amount of tax on your income and other taxable gains, making it easier to manage your finances while living as an expat in Spain.
Always stay updated with the latest tax laws and consult a tax professional to ensure you’re maximizing your available reliefs and credits. This proactive approach can help you navigate the complex tax landscape and fulfill your tax filing obligations efficiently.
Spanish Taxes for Expats
What Are the Residency Rules?
- Expat tax rules apply if you reside in Spain for 183 days.
- You are considered a tax resident if you have property in Spain.
How Does Income Tax Work?
- Expats pay taxes in Spain on their worldwide income.
- Specific tax rates apply to savings income.
- Spain’s tax system includes a primary tax on income.
What Is the Non-Resident Tax?
- Flat tax rate of 24 % for non-resident income tax.
- Non-resident of Spain must pay this tax.
What Are the Tax Agreements?
- The US has a totalization agreement with Spain to avoid double taxation.
- The totalization agreement with Spain helps Americans in Spain.
How Do You File Taxes?
- Tax authorities require a tax return in Spain for the tax year.
- Online tax services assist with tax purposes and tax avoidance.
What Are the Special Regimes?
- Unique tax regime for expatriates in Spain.
- Expats in Spain are subject to national tax laws and special tax rules.
What Other Taxes Apply?
- Value-added tax and local tax apply to goods and services.
- Taxable in Spain in the year following the tax year.
Further reading: What is IRS Tax Form 1040NR for Non-Resident Aliens: Understanding Taxation for Nonresident Aliens and Resident Aliens by Internal Revenue Service
Key Takeaways
- Residency Test: Determine if you're a resident of Spain by spending more than 183 days in Spain.
- Worldwide Income: Residents pay tax on their worldwide income to Spain.
- Non-Residents: A non-resident in Spain pay income tax only on Spanish-sourced income.
- Tax Agreements: Use treaties to avoid double taxation if you move to Spain.
- Wealth Tax: Spain imposes a wealth tax on assets over a certain threshold.
- Compliance: File annual tax returns and pay taxes timely to avoid penalties, adhering to Spanish income tax rates.
- Non-Resident Tax Rate: Non-residents in Spain with a home in Spain are subject to a tax rate of 24% on their Spanish-sourced income, as Spain has the right to tax this income.
How can Taxfyle help?
Finding an accountant to manage your bookkeeping and file taxes is a big decision. Luckily, you don't have to handle the search on your own.
At Taxfyle, we connect small businesses with licensed, experienced CPAs or EAs in the US. We handle the hard part of finding the right tax professional by matching you with a Pro who has the right experience to meet your unique needs and will manage your bookkeeping and file taxes for you
