Spain is a top destination for American expats, thanks to its pleasant climate, excellent healthcare, and appealing lifestyle. Settling in Spain, however, comes with the responsibility of handling taxes in both the U.S. and Spain. Navigating dual tax obligations can be complex, but understanding these requirements helps expats avoid expensive penalties and ensure compliance with both tax systems.
Knowing the basics is the first step to staying on the right side of tax laws as an expat.
Understanding Taxes for Expats in Spain: Residency Rules
To determine whether you’re a tax resident in Spain, several key criteria apply:
- 183-day rule: Expats who spend more than 183 days in Spain within a calendar year are considered tax residents.
- Economic interests: You may also be deemed a tax resident if the majority of your economic activities or income are centered in Spain.
- Family ties: If your spouse or “minor” children live in Spain, you may automatically qualify as a tax resident.
Spanish residents are taxed on their worldwide income, while non-residents are only taxed on income sourced from Spain.
Taxes in Spain: Rates and Brackets
Spain has a progressive income tax system, meaning residents are taxed at increasing rates based on their income levels. The tax rates for residents in 2024 are as follows:
- Up to €12,450: 19%
- €12,450 to €20,200: 24%
- €20,200 to €35,200: 30%
- €35,200 to €60,000: 37%
- €60,000 to €300,000: 45%
- Over €300,000: 47%
For non-residents, the tax rate is simpler. They are taxed at a flat rate of 24% on income earned in Spain. Non-residents from European Union (EU) or European Economic Area (EEA) countries, however, benefit from a lower flat rate of 19%.
Types of Taxable Income in Spain
U.S. expats living in Spain need to be aware of the different types of income that are taxable under Spanish law. Each income category is subject to specific tax rates and regulations.
Here’s a breakdown of the main types of taxable income:
- Employment income: Income earned from employment is taxed progressively. Spanish residents are taxed based on their total income with rates ranging from 19% to 47%, depending on how much they earn annually.
- Self-employment income: Freelancers and business owners in Spain are subject to both income tax and mandatory social security contributions. Self-employed individuals must file quarterly tax returns and pay into Spain’s social security system, which can result in higher taxes compared to traditional employment.
- Investment income: Dividends, interest, and capital gains are taxable at rates that range from 19% to 28%, depending on the amount of income earned. This includes profits from the sale of stocks, bonds, and other investments.
- Rental income: Rental income is fully taxable in Spain. However, landlords who offer long-term rentals may qualify for a 50% reduction in their taxable income, making it a popular option for expats who own property in Spain.
The Beckham Law
The Beckham Law, named after footballer David Beckham, was introduced in 2005 when he moved to play for Real Madrid. This law offers a special tax regime for highly skilled foreign workers, making Spain an attractive destination for expats.
Expats who have not been residents of Spain for the past 10 years and work for Spanish companies may qualify for the Beckham Law. Under this law qualifying individuals are taxed as non-residents, meaning they pay a flat rate of 24% on income earned in Spain for up to six years. This allows top-earning expats to avoid the higher progressive tax rates applied to Spanish residents.
U.S. Tax Obligations for Expats
Navigating taxes for U.S. expats living in Spain can be complex, as they must comply with both U.S. and Spanish tax laws, reporting worldwide income regardless of residency. This means even while living in Spain, American expats have several key obligations to fulfill:
- Citizenship-based taxation: U.S. expats must file annual tax returns on their global income, including wages, investment income, and business earnings.
- Foreign Earned Income Exclusion (FEIE): Expats can exclude up to $126,500 of foreign-earned income from U.S. taxes (2024) if they meet the eligibility criteria such as the physical presence or bona fide residence tests.
- Foreign Tax Credit (FTC): To avoid double taxation, U.S. expats can claim a dollar-for-dollar credit for taxes paid to Spain on the same income, lowering their American tax liability.
- FATCA and FBAR reporting: Expats must report foreign assets exceeding $50,000 (FATCA) and any foreign accounts totaling over $10,000 (FBAR), ensuring compliance with financial reporting requirements.
U.S. and Spanish Tax Forms for American Expats
American expats in Spain are required to file several important tax forms to remain compliant with both U.S. and Spanish tax laws. Below are the key forms U.S. citizens must file to meet their tax obligations while living abroad:
- Form 1040: All American citizens and residents must file this form annually, reporting their worldwide income, regardless of where they reside.
- Form 2555: Used to claim the Foreign Earned Income Exclusion (FEIE), this form allows expats to exclude up to $126,500 of foreign-earned income in 2024.
- Form 1116: Expats can claim the Foreign Tax Credit (FTC) to avoid double taxation on income that is taxed by Spain and the U.S.
- FinCEN Form 114 (FBAR): Expats must report any foreign bank accounts if the total combined value exceeds $10,000 during the tax year.
- Form 8938: FATCA requires expats to report foreign financial assets over certain limits to the IRS.
In addition to the U.S. tax forms required by the IRS, expats living in Spain must also file important Spanish tax forms to comply with local tax regulations.
Below are the main Spanish forms that American expats should be familiar with:
- Form 100: This is the standard personal income tax return for residents of Spain. All residents, including expats, must file this form to report their worldwide income.
- Form 210: Non-residents who earn income in Spain need to file Form 210 to declare their Spanish-source income. This includes income from property rentals or investments in Spain.
- Form 720: This form is required for declaring foreign assets if the value exceeds specific thresholds. Expats with foreign bank accounts or investments must submit Form 720 to ensure compliance with Spain’s reporting requirements.
Submitting the required forms ensures compliance with both U.S. and Spanish tax regulations, helping expats avoid penalties.
Tax Filing Deadlines for Expats
Understanding tax filing deadlines is essential for expats in Spain to stay compliant with both Spanish and U.S. tax authorities:
- In Spain, the filing period for personal income taxes runs from April 1 to June 30 each year. Expats who are self-employed must also submit quarterly returns in April, July, October, and January.
- For U.S. citizens living abroad, the standard filing deadline is April 15, but expats receive an automatic extension until June 15. If needed, you can request an additional extension to file by October 15.
Key Tax Tips for Expats in Spain
Navigating tax regulations can be tricky, but these practical tips can help you stay compliant:
- Keep detailed records: It’s important to keep track of the days you spend in Spain, especially if you are close to meeting the 183-day residency requirement for tax purposes.
- Use tax treaties: The U.S.-Spain tax treaty can help prevent double taxation, allowing you to claim credits for taxes already paid in Spain, thus lowering your U.S. tax bill.
- Seek professional help: Consulting experienced tax professionals will ensure you’re meeting your obligations in both Spain and the U.S. while maximizing any benefits or credits available.
Conclusion: Stay Compliant With Expert Help
Effectively managing taxes in Spain for expats involves navigating both U.S. and Spanish tax systems, understanding provisions like the Beckham Law, and staying on top of required filings. Failure to comply can result in significant penalties from both tax authorities. Working with Expat CPA ensures you meet all deadlines and legal requirements while maximizing available tax benefits.
For personalized assistance, schedule a free consultation with Expat CPA today and remove the hassle and worry from next year’s tax season.