Understanding Tax Residency in the US and Spain
We have created a new website for Americans who wish to obtain international tax advice when leaving the United States (US).
Spain has become an increasingly popular destination for American expats. While the appeal of Spain’s lifestyle, lower cost of living, and Mediterranean climate is undeniable, the tax implications of moving between the US and Spain can be complex. One of the first considerations for expats is tax residency. Spain determines tax residency based on the 183-day rule, meaning that if an individual spends more than half the year in Spain, they are considered a tax resident. However, despite meeting this threshold, Spain may still classify someone as a tax resident if their main economic interests or family ties are in the country. This is particularly relevant for individuals who own businesses in Spain or have a spouse and children residing there.
Unlike Spain, the United States taxes citizens and green card holders based on citizenship rather than residency. This means that even if Americans live in Spain full-time, they must file a US tax return annually. The requirement to comply with both tax systems creates the potential for double taxation, making it essential to understand how to claim relief through the US-Spain tax treaty or other mechanisms.
Avoiding Double Taxation: US-Spain Tax Treaty and Foreign Tax Credits
For Americans living in Spain, one of the biggest concerns is the possibility of being taxed twice on the same income. The US-Spain tax treaty provides relief by allowing individuals to use Foreign Tax Credits (FTC), which offset US taxes with the taxes already paid in Spain. Given that Spain’s progressive income tax rates can reach up to 47%, most US expats find that claiming the FTC is more beneficial than using the Foreign Earned Income Exclusion (FEIE), which allows the exclusion of up to $130,000 (2025 limit) from US taxation. However, Spain does not recognize the FEIE, meaning that any income excluded under this provision would still be subject to Spanish taxation.
A typical tax planning strategy for US expats in Spain is to ensure they are not overpaying tax in either country. If a US citizen has already paid a higher tax rate in Spain than what they owe in the US, the Foreign Tax Credit eliminates any additional US tax liability. However, if the US tax rate is higher for certain types of income—such as capital gains or investment income—it may result in an additional US tax bill. Understanding how income is classified in each country and using tax-efficient strategies is essential to reducing overall liability.
Key Tax Filing Requirements for US Expats in Spain
Living in Spain does not exempt US citizens from their IRS filing obligations. Americans abroad must continue filing IRS Form 1040 each year and may also have additional reporting requirements. One of the most critical obligations is the Foreign Bank Account Report (FBAR), which must be filed if an individual’s total foreign account balances exceed $10,000 at any point during the year. Form 8938 (FATCA) must be submitted if foreign financial assets surpass $200,000 for single filers or $400,000 for married filers.
In Spain, tax residents must comply with Modelo 720, a mandatory declaration of foreign assets exceeding €50,000. Spain has some of the most stringent penalties in Europe for failure to comply with this requirement, with fines reaching thousands of euros for incomplete or incorrect reporting. Professional tax advice is often necessary for expats with significant overseas investments to ensure compliance with both Spanish and US regulations.
Taxation of Investments, Pensions, and Retirement Accounts
Investments and pensions are another complex area for US expats in Spain. One of the biggest challenges comes from treating US-based retirement accounts such as 401(k)s and IRAs. While these accounts provide tax-deferred growth in the US, Spain does not recognize them as tax-exempt retirement vehicles. Instead, Spain may tax these accounts as investment funds, potentially leading to higher annual taxation on unrealized gains.
US Social Security benefits are another key consideration for retirees living in Spain. Under the US-Spain Totalization Agreement, US Social Security benefits are generally taxable only in the country where the recipient resides. This means that Americans living in Spain will pay Spanish tax on their Social Security income rather than US tax. However, depending on the individual’s overall tax situation, tax treaty elections and careful income planning can help minimize tax burdens.
Another vital tax consideration is how capital gains and dividends are taxed in each country. Spain taxes capital gains from 19% to 28%, which can be higher than the corresponding US rates. Understanding the tax treatment of stocks, bonds, and other assets in both countries is crucial for Americans with significant investment portfolios. Additionally, Spain has strict anti-tax avoidance measures, including taxation on foreign passive income, meaning that certain US-based investment structures, such as foreign trusts or LLCs, may not offer the same tax advantages as they do in the US.
Planning for Tax-Efficient Living in Spain
Given the complexity of US and Spanish tax laws, expats moving between the two countries need to take proactive steps to minimize liabilities and ensure compliance. Proper tax planning should begin before relocation, as structuring income, investments, and business interests correctly can lead to significant savings. Key strategies include timing income to optimize tax treatment, taking full advantage of available tax credits, and understanding how tax residency laws impact reporting obligations.
Working with a tax advisor who understands US and Spanish tax systems is often essential. Expats should consider professionals specializing in dual taxation matters and are well-versed in the US-Spain tax treaty, ensuring they benefit from all available relief provisions. Additionally, staying up to date with annual tax law changes in both countries can help prevent unexpected tax bills and penalties.
For those considering a long-term stay in Spain, evaluating the implications of Spanish tax residency on inheritance and estate planning is also critical. Spain’s inheritance tax system varies by region and can significantly impact wealth transfer plans. US expats should explore options such as trust structures, gifting strategies, and dual-tax treaties to avoid unnecessary taxation on inherited assets.
Frequently Asked Questions (FAQs)
Do I need to file US taxes if I live in Spain?
All US citizens and green card holders must file a US tax return annually, regardless of residency.
How can I avoid paying taxes twice in the US and Spain?
The US-Spain tax treaty allows expats to claim Foreign Tax Credits, offsetting US tax obligations with taxes already paid in Spain.
Does Spain tax my US retirement accounts?
Yes, Spain may tax 401(k) and IRA withdrawals and, in some cases, treat them as investment funds subject to annual taxation.
What is Modelo 720, and do I need to file it?
Modelo 720 is a mandatory foreign asset declaration for Spanish tax residents if their overseas assets exceed €50,000.
Can I still contribute to my US IRA while living in Spain?
IRA contributions are only allowed if the individual has US-source earned income.