Spain’s relaxed culture, deep history, and stunning scenery have drawn countless Americans to make it their home. While living in Spain can be a wonderful experience, US expats must remain mindful of their tax obligations. Whether you’re an employee or an entrepreneur, you must file a personal income tax return each year. This article provides a high-level overview of how taxes work in Spain. For specific guidance, you should seek the assistance of a professional expat accountant.
US citizens detailed overview of US citizen living in Spain taxes living in Spain must file Form 1040. The deadline for filing is April 15. However, expats who meet certain residency and physical presence requirements can qualify to file a Form 2555 and exclude a portion of their foreign earnings from federal income taxation.
Aside from the Form 2555, Americans who live in Spain should also consider claiming the Foreign Earned Income Exclusion. Since Spanish income taxes are significantly higher than US rates, the FEIE can save you thousands of dollars annually.
The United States and Spain have a tax treaty in place that protects Americans from paying double taxation on the same income. To take advantage of this protection, you must properly claim the Foreign Tax Credit on your US tax return. This is a complex process and should be done by an experienced expat tax professional.
Besides taxes on wages, Americans living in Spain must also pay local property taxes. These taxes vary by region but typically include a value-added tax (IVA) of 10%. This tax is applied to a variety of goods and services including food, water, medical goods, domestic travel by road and rail, hotel accommodations, bars, and more.
If you’re an American expat in Spain, you should be aware that it’s a common practice for Spanish banks to ask for your social security number when opening an account. This is because US persons must report any financial assets held abroad on a FBAR (FinCEN Form 114) or 8938 (Statement of Specified Foreign Financial Assets) if the total value of those assets exceeds a certain threshold.
In addition to reporting any foreign assets, US expats in Spain must declare their income each year. Self-employed individuals must submit Form 390. Employers must also withhold payroll taxes from employee paychecks. Those who are self-employed and/or a freelancer must make proactive quarterly estimated tax payments to avoid penalties.
While the cost of living in Spain is lower than in many other European countries, it’s still fairly costly. That’s why it’s important for American expats in Spain to take advantage of the Foreign Earned Income Exclusion and other tax breaks available to them. Moreover, Americans living in Spain should be aware that their pensions may be subject to dual taxation by both the US and Spain. Therefore, it’s essential to consult with an expert tax advisor familiar with both US and Spanish tax law. This is especially true for those with multiple foreign bank accounts and investments in multiple currencies.