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 derived from a Spanish source rather than an American, 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 U.S. tax accountants about your tax situation by calling U.S. Tax Help at (541) 362-9127.

Do I Still Have to Pay U.S. 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. This is not an uncommon situation for people who work for multinational corporations. Even though you live and work in Spain, your income is derived from a source within the United States.

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 your income is derived 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.

However, there are other tax liabilities other than income you should consider. For example, you might still be on the hook for Social Security taxes if you are a U.S. citizen. However, 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 U.S. Taxable Income as an Expat Living in Spain

You might be unsure of your tax situation in the United States and Spain, and you should speak to a tax accountant about your situation as soon as possible. Even if you are not liable for paying taxes in the US, you might still have to file. If you can take advantage of certain tax credits or exclusions, you must file the proper paperwork and claim those tax breaks.

Foreign Tax Credits

If you already pay your 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 a 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. Other taxable money or assets, like property, are not eligible for this credit.

To claim this credit, you must fill out and submit Form 1116 when you file your U.S. taxes. If you plan to use this tax credit, you should pay your Spanish taxes first before filing your U.S. taxes. The income that Spain taxes may be credited to your U.S. taxes. For example, if you 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 not completely eliminate it. Always speak with a tax professional before filing anything.

Foreign Earned Income Tax Exclusions

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 this exclusion, you must meet one of the following criteria:

  • You are a United States citizen and resident of a foreign country for an uninterrupted time that includes a whole tax year,
  • You are a U.S. resident alien and citizen of another country that has a tax treaty with the U.S., and you live in a foreign country for at least one entire tax year, or
  • You are a U.S. citizen or resident alien present in another country for no less than 330 days during any consecutive 12-month period.

If you meet one of these eligibility requirements, you can exclude income you earned from foreign sources from your U.S. federal income taxes. For example, perhaps you earn income from your U.S. business and work in Spain totaling $200,000. You must declare your total worldwide income in your U.S. taxes. However, if $75,000 of your worldwide income is derived from Spain, you might reduce your U.S. taxable income to $125,000. However, you might have to pay income taxes on the $75,000 you excluded in Spain.

Exclusions for Housing Expenses

Many people move to Spain for their jobs. Perhaps your company has offices in Madrid, and 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 the provision of 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 a 2-year period 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.

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

Talk to our dedicated U.S. tax accountants about your foreign tax situation by calling U.S. Tax Help at (541) 362-9127.

6 Common Taxpayer Mistakes