It’s a complicated topic that many American residents, and even professionals, are confused about, so it’s important to know what the law actually says.

Liberty Atlantic Advisors, a team of professionals specialising in helping U.S. taxpayers abroad, are here to help clear things up.

Spain applies a residence-based taxation system, meaning that if you qualify as a Spanish tax resident, you are required to file a Spanish tax return.The key takeaway here is this: If you qualify as a Spanish tax resident, it usually doesn’t matter if the income is U.S. sourced, whether it’s earned money (such as from work) or passive income (such as from U.S. retirement account distributions), or otherwise generated outside of Spain.

As an American citizen, when you become a Spanish tax resident, you become liable for filing two tax returns: A U.S. tax return for those Americans living abroad and a Spanish tax return.

Tax in Spain for residents 

 If you research this topic, you may come across the “183-day rule” which is often cited as a simple means of tracking (and proving, if the Spanish tax authorities inquire) whether or not you qualify as a Spanish tax resident.

The rule is true in the sense that the number of days you spend in Spain in each year does matter, but it’s actually part of a multi-part test Spain applies when deciding whether or not you qualify as a Spanish tax resident.

The 183 counts toward the “presence test” but there are also tests related to your “centre of economic interest” and “family ties.” These tests examine, among other things, where your income is generated and where your family live. If you have children, a good indicator of whether you’ll be considered a Spanish tax resident can be looking at where they are enrolled in school.

For Americans in Spain, a new lifestyle often means a new financial reality. Photo: Pixabay

Taxes for American retirees in Spain 

Assuming you qualify as a Spanish tax resident, taxes for Americans in Spain can quickly become complicated even once you understand you have two returns to file.

When you live in the U.S., the tax deadline is April 15th. But U.S. citizens living abroad get an automatic 2-month extension to June 15th, and it’s common to request a second extension until October 15th (which you can do by e-filing Form 4868 for free on the IRS website).

It’s generally recommended to take the October extension when you live in Spain because having a finalised Spanish tax return will inform how you file your U.S. tax return. So, to clearly answer the question, “Do I file my taxes in the U.S. first or Spain?” the answer is usually Spain.

“It ends up being a coordination game between your U.S. advisor and your Spanish advisor,” says Nicolás Castillo, founder and CEO of Rook International CPAs and Advisors.

Note: While the deadlines facilitate delaying filing your U.S. tax return, April 15th is still the deadline to pay any tax you expect to be due, such as self-employment income.

Planning retirement in Spain? Get expert guidance on U.S.–Spain tax and financial planning.

When retirement crosses borders, your financial plan should too. Photo: Pixbay

Retirement account taxation 

So, you know you’ve got to file your Spanish tax return first, but how do you report retirement distributions in Spain?

This unfortunately means that you will pay too. Assuming you are not under any special tax regimes, such as the Beckham regime, Spain treats U.S. retirement account distributions, from an Individual Retirement Account (IRA) for example, as ordinary income, and taxes it at Spanish income tax rates. Tax rates in Spain are progressive and go up to 54 percent.

Distributions from a Roth IRA are taxed as investment income on the portion considered earnings.

Social Security is taxed as ordinary income, with some nuance. Although it would seem that public pensions would be exempt from Spanish taxation under Treaty Article 20(1)(a), Treaty Article 20(1)(b) gives Spain the non-exclusive right to tax Social Security benefits. For that reason, U.S. Social Security benefits may be studied to categorise them based on the nature of the individual’s career (i.e., public vs private sector). The articles referenced can be found on pages 16-17 of the U.S.-Spain income tax treaty.

As you can see, it’s extremely important to work with a Spanish accountant who understands the complex nature of filing as a U.S. citizen who is tax resident in Spain.

Moving to Spain? Make sure your retirement and tax strategy is built for cross-border life.

Should I sell or should I rent?  

If you are from the U.S. and are planning to move to Spain, deciding whether to sell or rent your residence is an important decision with potentially serious tax consequences. When it comes to the question of selling your residence in the U.S. (assuming it’s primary residence), ideally, you want to sell your home before moving to Spain. In other words, you want to be a U.S. tax resident, not Spanish tax resident, when you sell your home.

This is because Spain does not recognise the U.S. capital gains exclusion on the sale of a primary residence. Now, if you must sell your property as a Spanish tax resident, there may be planning options with respect to whether you intend to purchase a Spanish residence, but these are details to dig into with your U.S. accountant (CPA), along with questions of managing U.S. rental income and the associated taxation.

U.S. Spain Tax Treaty 

Throughout this article, we’ve answered questions and referenced a treaty between the U.S. and Spain.

This refers to the U.S.-Spain Tax Treaty, which is an agreement signed by both countries that details which country has the right to tax, what gets taxed, and at what amount. When a Spanish person moves to the U.S. and becomes a tax resident there, this is the document that they use to navigate their taxes – the complexities go both ways.

U.S. tax planning for retirees in Spain 

Taxes in Spain for retirees and working-age people from the U.S. can get complicated quickly, particularly if you have additional considerations such as the Spain wealth tax. It’s a bit ironic because Spain is broadly considered to be one of the best retirement destinations in the world, and while there’s no question about the country’s appeal, it is important to understand that how you’ve planned for retirement in the U.S., or how you think about long-term financial planning in the U.S., must fundamentally change when you become a Spanish tax resident.

At Liberty Atlantic Advisors, we’re a team of current and former expat professionals specialising in helping U.S. taxpayers redesign their U.S. financial plan for a long-term life in Spain. We consider all of your investible assets, the particular accounts they’re located in, and make the effort to get to know you to understand what kind of life you envision in retirement, so that your financial life is as stress-free as possible. 

Living in Spain as a U.S. retiree? Get help aligning your tax strategy with your retirement plan.

Disclaimer

This material is purely intended to be general and educational in nature, and should not be construed as specifically-tailored investment, financial planning, tax, legal, or other professional advice. Information and data contained herein is as-of the date of publication, and may be subject to change in the future without notice. Any investment performance referenced is purely past performance, which is no guarantee of any future performance. Nothing contained herein should be construed as an offer to sell, a solicitation of an offer to buy, or a recommendation of any security or other financial product or investment strategy. All investment, tax, and financial planning strategies involve risk that you should be prepared to bear. You are highly encouraged to consult with professionals of your choosing before taking any action based on this material.