US Taxes for Expats Living in Spain

For years, Spain’s relaxed culture, deep history, and beautiful scenery have been a big draw for American expats. If you are a U.S. citizen living and working in Spain, you should be aware of certain tax implications.

Generally, U.S. citizens are still liable for paying their U.S. taxes even if they live in another country. However, depending on your situation, there might be tax credits, exemptions, or exclusions to help you reduce the amount of taxes you owe the United States. Typically, if your income is from a Spanish source rather than an American one, you can exclude that income from your taxes or apply for a tax credit. Additional tax breaks and exemptions might apply depending on whether you are a Spanish tax resident. Dealing with international taxes can be complicated, and you should consult with an experienced tax accountant before filing anything.

Speak to our experienced tax CPAs for American expatriates living in Spain about your tax situation by calling US Tax Help at (541) 362-9127.

Do I Still Have to Pay US Taxes While Living in Spain?

United States citizens are required to pay their taxes no matter where they live, even if they live abroad. U.S. expats in Spain might still have to pay federal income taxes. However, depending on how you earn a living in Spain, you might not be liable for a certain amount of your U.S. taxes.

If you earn income from a source in the United States, you probably have to pay some tax to the U.S. government. For example, you might live full-time in Spain but work for a U.S. corporation whose offices happen to be in Spain. Or, you might work remotely for an American company while living abroad. Even though you live and work in Spain, your income is derived from a source within the United States, meaning you may have to pay taxes on it.

If you are a U.S. citizen living full-time in Spain with no financial ties to the United States, you might not have to pay U.S. taxes, at least to a certain extent. If you get income from a Spanish source (e.g., a business or corporation based in Spain), you might not have to pay taxes on that income to the U.S. if you already pay taxes to Spain.

That said, there are other tax liabilities you should consider besides income tax. For example, you might still be on the hook for Social Security taxes if you are a U.S. citizen. Fortunately, the U.S. and Spain have a totalization agreement where you only have to pay into one country’s Social Security system, not both.

Reducing Your US Taxable Income as an Expat Living in Spain

Even if you are not liable for paying taxes in the U.S., you might still have to file a return with the IRS annually. When preparing your return, our tax accountants can see if you qualify for certain tax credits or exclusions and help you file the proper paperwork and claim those tax breaks while living in Spain.

Foreign Tax Credit

If you already pay income taxes in Spain and are subject to taxation on the same income by the United States government, you can avoid double taxation by claiming the foreign tax credit. In short, you do not have to pay taxes on the same income twice to two different countries.

The foreign tax credit reduces your taxable income in the U.S. if you have already paid taxes in Spain. Only certain kinds of taxes may qualify for this credit, including normal income, war profits, and excess profits taxes. Other taxable money or assets, like property, are not eligible for this credit.

To claim the foreign tax credit, our tax CPAs for American expatriates will help you fill out and submit Form 1116 when preparing your U.S. taxes. If you plan to use this tax credit, you should pay your Spanish taxes before filing your U.S. taxes. The income that Spain taxes may be credited to your U.S. taxes. For example, if you already paid $2,500 in income taxes to Spain, you may claim $2,500 as a tax credit in the United States.

Keep in mind that the foreign tax credit may help reduce your taxable income in the United States, but it might only partially eliminate it. If you assume your tax liability is gone when that is not the case, you might incur penalties from the IRS.

Foreign Earned Income Tax Exclusion

U.S. citizens living in other countries are taxed on their worldwide income, including income derived in other countries. If you meet specific eligibility requirements, you can exclude your income earned in foreign countries from your U.S. taxes up to a certain amount.

To take advantage of the foreign earned income exclusion (FEIE), you must pass the bona fide residence test or the physical presence test. These tests assess a taxpayer’s residency status. If you have been physically present in Spain long enough or have established residency there, you can likely use the foreign earned income exclusion.

If you meet one of the eligibility requirements, you can exclude income you earned from foreign sources from your U.S. federal income taxes. For 2024, the maximum foreign earned income exclusion amount is $126,500 per person. If you file U.S. taxes jointly with your spouse, you can both exclude that amount, totaling $253,000 for your joint return. Expats use Form 2555 to use this exclusion.

Remember, you can only use the FEIE on income from foreign sources. So, if you live in Spain but work remotely for an American company, you cannot use the FEIE to exclude any of your income from taxation.

Exclusions for Housing Expenses

Many people move to Spain for their jobs. Perhaps your company has offices in Madrid, they have relocated your position to those offices, and you are expected to live in Spain for the foreseeable future. In such cases, employers sometimes cover the costs of housing, food, and various living expenses for relocated employees. While providing for housing and other necessities is technically considered income, you can exclude it from your taxes.

For example, if your job is moved to Spain for two years with the expectation that you will eventually return to the United States, the money paid to you to cover living expenses, including housing, can be excluded from your U.S. federal income taxes. For example, if you are given $10,000 annually to help with living expenses, you can have this excluded.

Tax Filing Deadlines for US Expats Who Live in Spain

Generally, all taxes are due by Tax Day, no matter where you live in the world. That said, the IRS understands that filing taxes can be more challenging for expatriates, so it offers an automatic two-month filing extension for tax returns.

If you take advantage of the two-month extension, you would have until about mid-June to send your completed tax return and additional materials to the IRS. Expats shouldn’t make it a practice to use the two-month extension but can benefit from it to avoid late filing penalties. However, if you owe taxes to the IRS and do not pay them by Tax Day, interest will start accruing on the unpaid tax despite the filing extension.

Expats who need even more time to file taxes can request an additional six-month filing extension. This extension is based on the original due date for your taxes, Tax Day.

The IRS might assess penalties for late filing, even if it is unintentional and non-willful. To make meeting filing deadlines easier when you go abroad, learn about your tax liability before moving. Our tax accountants can prepare you for your likely reporting responsibilities so that you can anticipate the amount of time it will take to fill out and submit your tax return.

FATCA and FBAR Compliance for American Expatriates Living in Spain

On top of filing their annual tax returns, expats must comply with the reporting requirements of the Foreign Tax Compliance Act (FATCA) and the Foreign Financial Crimes Enforcement Network (FinCEN). Failure to do so could result in lofty penalties for expats residing in Spain or elsewhere.

FATCA Compliance

Under FATCA, expats must report specified foreign financial assets over a certain amount. Our tax CPAs for American expatriates can do this using IRS Form 8938. If you’re filing your return alone, you must submit Form 8938 if you had more than $200,000 in specified foreign financial assets on the last day of the tax year or more than $300,000 at any time during the tax year.

If you’re filing a joint U.S. return with your spouse, you must submit Form 8938 if you had more than $400,000 in specified foreign financial assets on the last day of the tax year or more than $600,000 at any time during the tax year.

If you do not comply with FATCA and submit Form 8938 when required, you could face serious financial penalties from the IRS. Initial penalties start at $10,000 but could go up to $50,000 for expats.

Often, expats do not meet the reporting thresholds for IRS Form 8938 until after many years of living abroad because the thresholds are relatively high. If you have lived in Spain for some time, revisiting your reporting requirements and making sure you’re up to date on any new forms or supplemental materials may help you avoid unnecessary fines from the IRS.

FBAR Compliance

You must also comply with FinCEN and submit a Report of Foreign Bank and Financial Accounts (FBAR), depending on the sum of your foreign financial holdings. Expats with more than $10,000 across foreign bank accounts and other financial accounts must file an FBAR annually.

Our tax accountants can help you submit an FBAR online and on time through FinCEN’s BSA e-filing system. Failure to file an FBAR might also result in costly penalties for expats, up to $100,000 or 50% of the balance of bank accounts.

Call US Tax Help About Your Taxes if You Are an Expat Living in Spain

Talk to our dedicated tax CPAs for American expatriates living in Spain about your foreign tax situation by calling US Tax Help at (541) 362-9127.