When US citizens move abroad, they must file US expat taxes to the IRS. This is a requirement that is not optional, and it applies regardless of whether the US citizen is a permanent resident of Spain or not. However, there are several tax breaks and exemptions that can reduce the US filing requirements for Americans living in Spain.
The first step in filing US expat US tax returns Spain in the guide by US tax accountant Derren Joseph taxes Spain is to determine if the individual qualifies as a resident for US tax purposes. Generally speaking, individuals who have lived in the country for at least a year are considered residents. Spouses who are both residents may file a joint return or a separate return, depending on their preference and the circumstances of their situation.
Once the residency status is established, the next step is to determine if the individual qualifies for any tax breaks. For example, American expats who work in the United States and receive income from a job in Spain may be eligible for the Foreign Earned Income Exclusion or the Housing Deduction. These breaks can significantly lower the overall amount of income tax paid by the individual.
Another possible break is the Foreign Tax Credit, which can be claimed on Form 1116. This can offset the effects of double taxation, which can occur when the same income is taxed by both the United States and Spain. This credit can be used to eliminate any tax liability that exceeds the amounts excluded by either the Foreign Earned Income Exclusion or housing deduction.
Depending on the particular situation, there may be other taxes and reporting requirements that need to be addressed by an American expat who lives in Spain. For instance, many autonomos (small businesses) are required to collect a 4% Value Added Tax (IVA), which is typically factored into the price of goods and services. Individuals who have foreign assets in excess of $50,000 must also file FinCEN Form 114, commonly known as the FBAR.
Property taxes may also be a consideration for those who own real estate in the country. Local property taxes are usually based on a percentage of the value of the property, and this can vary by region. In addition, when a property is sold, the individual must pay an additional tax referred to as Plus Valia.
Finally, interest income can be a significant source of income for expats who live in the country. This income is often generated by savings accounts, fixed deposits, bonds and other debt instruments. In general, interest income is taxed at a flat rate in the country, but American expats who receive dividends from US corporations might be eligible for a special deduction that can minimize their tax liability.