If you are an American Citizen or Green-card holder, you have the wonderful privilege of filing US taxes no matter where you live. If you live in Spain, it is unlikely you will owe anything due to the fact that taxes are higher and there’s a tax treaty with the US, but you will be generating a lot of paperwork. How much pain this will cause you varies a lot, depending on your level of wealth and desire to follow every detail of US tax law, no matter how silly.

The really sad part is that just doing regular things that no American in America would think twice about living in the US become extremely hazardous. Who thinks that buying a simple non-US whole life insurance policy would result in require filing multiple disclosure forms with the IRS, with $100Ks of potential fines if you don’t fill out everything correctly?

Big disclaimer: this is not tax advice, just my observations, and your personal conditions may be different and talk to a professional before doing anything life changing.

Are you going to bother?

If you think, fuck it, this is stupid, you can probably get away with not filing anything as long as you stay abroad and don’t have any US investments. Things get difficult if you move back to the US and you try to resume your life there. The IRS will probably wonder where you’ve been all these years and since there’s no statute of limitations on unfiled taxes or disclosures.

The statute of limitations is normally 3 years but has been extended to 6 years for gross misstatements of foreign income. This is your friend, since even if you accidentally forgot about some minor detail, it is better to have filed it than not.

Make sure you use your foreign address on the 1040 form, even if you still have a place in the US. Examinations generally take place at the address given on the return, so the IRS has to be pretty motivated to send an agent overseas.

In general, the odds of getting audited as a non-US resident are very small unless you do something really egregious.

By the way, good news on the FBAR forms. A recent supreme court ruling means a maximum of 10K fine for all unintentional mistakes on a form vs the previous interpretation that IRS had of 10K per mistake.

Things that are likely to get you in trouble

There are usually three main ways that people get caught up in the tax net:

  • Using the voluntary disclosure program. The IRS has a program for people who haven’t filed their returns or FBAR statements, but there are many horror stories about people facing huge penalties for admitting relatively small mistakes.
  • Filing a late informational disclosure like a FBAR or other informational return. The IRS has a history of automatically fining people huge amounts of money for these kinds of mistakes, even if there was little or no tax owed. Talk to a lawyer first to figure out what to do. There are many sad cases of people who thought they were doing the right thing and then get nailed by enormous penalties, despite not actually owing any taxes.
  • Making partial or silent disclosure of a potential tax issue. Silent disclosure is where you start reporting something without trying to correct the previous years and the IRS really hates that. (Also it’s a bonus to them since you basically admitted to previously breaking the law). Talk to a professional before doing anything like that to fully understand the risks.
  • Trying to be sneaky and avoid reporting thresholds by making lots of small transfers or trying to be clever by using crypto-currencies or cash. This is likely to trigger many more red flags than a single large unapologetic bank transfer.
  • Receiving a large incoming transfer from a foreign account without first clearing it with your bank and providing all the documentation they request. Also confirm any fees they might charge you if is in in foreign currency or just because they feel like charging you something.

Filing as US non-resident with a green card using tax treaty tie-breaker

If you have a Green Card, normally you do have to file as a US person and declare your world income. However, the US/Spain tax treaty has a tie-breaker clause that allows you to be tax resident in only one of the US and Spain. Sounds too good to be true? Well, if you ever want to be a US citizen, they will ask you if you’ve ever done this, and if so I assume they will not be too happy to give you citizenship.

Foreign tax credits

Unless you moved to Spain under the “beckham-tax” rules, allowing you six glorious years of 24% flat income tax, most likely you don’t owe any American taxes. You still need to file though. You can apply any income taxes (not social security, unfortunately) you paid to the Spanish government as a foreign tax credit.

You can carry-forward and carry-back (one year) your foreign tax credits. So after your last year of the Beckham tax, you can carry-back your excess tax credits back one year and get a big refund. Remember to fill out your Foreign Tax Credit Form twice, one for AMT, the other non-AMT.

The Foreign Earned Income Exclusion

The US lets you exclude $120,000 USD (in 2023 re-adjusted each year) of your foreign income from US taxation. This is an alternative to the foreign tax credit (you cannot double dip for the same amount).

Any income above $120,000 is taxed at a higher marginal rate, so if you make more, it may or may not be worthwhile using it vs just taking the foreign tax credits.

If you used either exclusion in a previous year, you have to REVOKE it if you don’t want to use it anymore. Once revoked, you need to wait six years before you can use it again unless you get special permission from the IRS.

Filing your taxes

Remember that you get an automatic extension for filing your taxes since you live outside the US, and it probably makes sense to wait to file your Spanish taxes so that you know the right amounts for your foreign tax credit.

However, you still need to PAY by April 15th to avoid interest charges.

I highly recommend using the government’s electronic EFTPS system. Pay a bit more than you think you will owe and put it in your estimated payments section of your return. Then ask for a refund for whatever extra.

Using EFTPS is better than including a mailing check with your return (if you do it by paper) since the IRS doesn’t respect the mailing dates for foreign mail and may stick you with late fees.

Tax traps

Stay away from non-US mutual funds, money market funds or ETFs. PFIC rules are a bitch, and now with the HIRE act, will be reportable even if you don’t sell them. If you want non-US exposure, buy individual shares of companies or bonds, or stick to US mutual funds that invest non-US (eg Vanguard ex-US world index).

Foreign whole-life insurance or annuities (anything other than term life). Avoid them, US annuity and life-insurance rules are different than European ones, so the best is just to buy term life-insurance or keep your US policy if you already have one (it is likely significantly cheaper than anything you can get in Spain). Non-term foreign life insurance and annuities need to be reported via FBAR and the internal interest may be reportable even if it stays in the policy.

Stay away from “financial advisers” who cold call foreigners. Most likely they will try to sell you some fee-laden piece of junk, that will then explode, lose all your money, and then leave you with a big tax bill for money you never got. Ask them if they are licensed to sell securities to Americans and watch how fast they run away.

Spanish company pension plans

Spanish pension plans are probably ok from a US tax perspective (since they by law must be offered to all employees) and are somewhat similar in IRAs in terms of withdrawal restrings. You can get a private letter ruling from the IRS (which would probably cost you $25,000) stating that the plan qualifies by US rules, or go through the hassle of trying to pay taxes on it, or just say, fuck it, I’ve tried my best and this thing looks close enough to a 401k for me.

401ks and IRAs in Spain

The Spanish tax agencies don’t seem to know or care too much about these as they are very similar to Spanish retirement programs. Roth IRAs are a bit dicey from a Spanish perspective since the income isn’t taxed on retirement (which means they might want to tax it now), so probably avoid contributing to those while you are here.

Withdrawals are something you should talk with a professional to make sure that you don’t get double taxed by accident.

Buying and selling a house

Owning a house has some of the same tax advantages as in the US. You get the same capital gains exemption on selling your primary residence as in the US, but there are several tricky issues if you feel the urge to tell the IRS about your home in Spain:

  1. When you sell your home, the US wants you to convert everything into dollars when reporting capital gains. This means that even if you sell your home for the same price in Euros, you might owe taxes because the dollar has dropped in value.
  2. To make things even worse, if you take a loan in Euros to buy your house, and the dollar gains in value, you owe taxes on your “currency gain” on the repaid loan as ordinary income. The crazy thing is that this cannot be applied against the capital loss, so you end up paying taxes even if you lost money.

Of course, you could just make your life simpler and just not to deduct or otherwise mention anything related to your mortgage (which is normal now that the mortgage interest deduction isn’t really that great anymore).

If the IRS decided to get really anal, they could even cite a wonderful law that says that you have to report and withhold 30% on any interest paid for non-US resident entities. The Spain/US tax treaty allows for loans that have a term of 5 years or more to be exempt from withholding as long as you 1) cite the tax treaty and 2) get some kind of proof that the entity you are paying is not US resident.

Inheritance or large gifts

In Spain the receiver of gifts or inheritance pays taxes, but in the US the giver has to pay. This can create a nasty situation where potentially both sides could end up getting taxed. If you receive a foreign gift or inheritance as a US citizen, you are supposed to file Form 3520 along with your taxes this year, even you though you don’t own anything. Remember that if you file Form 3520 late, standard practice you will be automatically fined the maximum penalty.

Important: If you are living in Spain and you happen to die, remember that Spanish law will apply by default (children inherit over spouses no matter what the will says) unless you explicitly get a will that states you have US citizenship and want US law to apply. This doesn’t affect your taxes, just prevents a nasty situation like your kids from suing your surviving spouse.

Self-employment

The IRS basically makes it very difficult to be self-employed and tax compliant unless you want to spend most of the money you make on tax advisors. Most people probably just report the income as W2 and hope for the best. Here are the wonderful ways that your life is made miserable:

  • Even though Spain and the US have a totalization agreement that does not require you to pay social security taxes in the US if you already do in Spain, you need to manually modify your return (look for the instructions for the tax software you use) since the IRS form does not allow you any way to say that you don’t owe it. This means you have to print and mail your return since it is no longer e-fileable.
  • Form 8858: The wording around this form changed in 2019 to include any US person doing business abroad, which essentially catches self-employed people as well. The penalties for actually companies or partnerships (vs just being self-employed) are pretty high, but for individuals the penalties are a 10% reduction in the amount of tax credits, which is pretty mild or even zero for most people (although that could change in the future). US tax preparers really want to push this form on you since they charge a lot of money for it (like $300) and almost no work for them.

Renting out a home in Spain

Even if you are renting it out in your name, again in theory the dreaded form 8858 strikes again. Ask your tax preparer to explain you the actual penalties for you (not corporations) before deciding to pay them to prepare it. The penalties may be a lot less than what the tax preparer is charging for the form. However, there may be some benefits to you as treating the home as a QBU since it means that you can do all the accounting in euros instead of dollars. Also if you sell it, it might be better since you don’t need to worry about exchange rate fluctuations when computing your capital gains.

Non-resident alien spouse

If you are here because you married an non-US citizen alien, you have one of the last legal tax avoidance available options to you. As long as your favorite alien can file as a US non-resident (or perhaps not at all if they don’t have any assets or income from the US), you may be able to file as as “single” and leave all the income of your spouse out of any US declarations. If you have kids or other dependents, you may even be able to file as “single, head of household”.

Before you attempt any of this, you should definitely talk to a tax advisor, since once you have this arrangement set up, any asset transfers between you and your spouse can have tax implications. In addition, should you ever get divorced, not having any assets in your name may come back to bite you quite severely.