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 should still file. Most Americans paying normal Spanish taxes will owe little or nothing to the US, but not filing leaves the years open forever. If you innocently missed past returns, look at the IRS streamlined foreign offshore procedure. It is specifically intended to let people abroad catch up without automatically paying penalties. Foreign companies, trusts or deliberate hiding are where this stops being a do-it-yourself job.

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. The Supreme Court ruled that an accidental mistake is penalized per annual FBAR, not once for every account on it. This does not protect someone who intentionally hid money, and the dollar amount changes with inflation. The useful rule is simple: file an FBAR if all your foreign accounts together went over $10,000 at any moment during the year.

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 wrong correction program. The scary old Offshore Voluntary Disclosure Program closed in 2018. If you live abroad and made an honest mistake, first read the much friendlier streamlined foreign offshore procedure. Do not put yourself into the criminal voluntary disclosure process just because you filed late.
  • 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, but the Spanish and US exemptions are not the same. The US may let you exclude $250,000 of profit ($500,000 on some joint returns) if it was your main home for two of the last five years. Spain has its own narrower rules. There are also several tricky US issues:

  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, there is another complication: US withholding rules can treat mortgage interest paid by a US person to a foreign bank as US-source interest. That does not automatically mean that 30% must be withheld; an exemption or the Spain/US tax treaty may reduce the rate to zero. The practical problem is proving that the bank qualifies. Doing so can require information and tax documentation about the bank that an ordinary mortgage customer is unlikely to receive, so you may not have enough information to determine or document the correct treatment yourself.

Inheritance or large gifts

In Spain the receiver of gifts or inheritance pays taxes, but in the US the giver normally pays. This can create a nasty situation where potentially both sides get taxed. A gift or inheritance from a foreign person is normally not US income, but if the total from foreign individuals or estates is over $100,000 for the year you usually have to send the IRS Form 3520. Gifts from foreign companies have a much lower limit that changes every year. Form 3520 is separate from your tax return and the late penalties can be horrible, so this is one deadline not to ignore.

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. If you are an employee of a foreign company, salary without a W-2 can legitimately go on the “other earned income” line of Form 1040. If you are an autónomo, technically the income and expenses belong on Schedule C. Some people instead report all their gross income as foreign earned income without taking any business deductions. That is the wrong category, but it is very different from hiding income or inventing a W-2. If the full amount is reported and Spanish tax already wipes out the US income tax, correcting the category may make little or no difference to the final bill. It can still affect foreign tax credit carryovers, IRA contributions, business losses and the separate question of US self-employment tax, so Schedule C is preferable when you can make it work. Keep a basic spreadsheet of payments and expenses and concentrate on these two complications:

  • In theory, the US-Spain agreement means a self-employed person living and paying social security in Spain should not also pay US self-employment tax. In practice, the IRS wants a Spanish certificate of coverage and Spain can make this nearly impossible to obtain. Ask the provincial TGSS office in writing and keep the request, replies and proof of Spanish payments. If they never produce the certificate, there is no clean do-it-yourself answer: you can claim the treaty exemption and attach what evidence you have, accepting that the IRS may reject it, or pay the US tax and try to recover it later. Some tax software cannot handle the exemption, so you may also be stuck printing the return. The SSA guide lists what the request should contain.
  • Form 8858 does not automatically apply just because you freelance in Spain. It is for a foreign company treated as part of you, or a real foreign branch with its own books. Many US tax preparers nevertheless insist on filing it: the extra form means extra fees, and filing it eliminates the extremely small risk that the preparer could be held responsible for signing a return that should have included it. That does not mean the form is actually required in your case. Ask the preparer to name the company or branch you are reporting and explain why your ordinary Schedule C is not enough. Unfortunately the definition is fuzzy enough that nobody can promise zero risk.

Renting out a home in Spain

Renting out a home in your own name does not automatically require Form 8858. Normally you put the rent and expenses on Schedule E, convert them to dollars and use US depreciation rules. Form 8858 becomes a real question only if you run the rental like a separate business with its own books. Calling it a QBU does not magically remove the exchange-rate problem when you sell.

Giving up US citizenship now makes little sense

There are two routes:

  • Renounce at a US consulate, a deliberate act done now.
  • Relinquish, asking State to recognize that you already gave up citizenship earlier, for example by naturalizing as Spanish.

Relinquishment used to be worth the trouble because the old $2 million net-worth test applied as of the date of that earlier act. The tax rules changed in 2008: the tax date is now generally when you document the act with State, not when you did it. So proving an old relinquishment gets you the same exit-tax exposure as renouncing today. Relinquishment is not cheaper, not easier, and no longer has a tax timing advantage over renouncing.

Never casually say you are doing this to avoid tax (despite the fact that 99% of people renouncing it are doing it probably exactly for that): the Reed Amendment can make you inadmissible. See the IRS expatriation guidance before doing anything.

Non-resident alien spouse

If you are here because you married a non-US citizen who is not a US tax resident, you have one of the last useful boundaries in the system: you normally leave their non-US income off your return. You file married filing separately, not single. If you support a child or another qualifying person, you may be able to use head of household instead. Think very carefully before electing to file jointly, since that pulls your spouse’s worldwide income and accounts into the US system too.

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.