Here's a collection of potential tax issues that face Americans and Green Card holders that live in Spain. First, one of the wonderful privileges of being American is that you have to file taxes no matter where you live. Even if you have no contact with America. Luckily, most of the world has higher income taxes than the US, so if you live in a country with a tax treaty with the US, you can usually avoid most of the pain.
Are you going to bother? Edit
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...
Your place or mine? Edit
Use you current foreign address on the 1040 form, even if you still have a place in the US. Examinations generally can take place at the address given on the return, so the IRS has to be pretty motivated to send an agent overseas.
Foreign bank accounts FBAR and IRS form 8938 Edit
If you are American, open a bank account in Spain and have more than $10,000 in aggregate in those accounts at any time during the year, you have to file FinCEN Form 114. If it's more than $50,000, you may need to include Form 8938 on your return. Here's a rundown from the IRS.
Tax resident in the US or in Spain? Edit
Since you have to pay US taxes anyway, consider if there's any way for you to remain tax resident in the US, even while living in Spain. For example, if your family and job are still US based, you may be able to claim a closer connection to the US according to the US/Spain tax treaty, which could allow you to not be a tax resident in Spain, even if you are there more than half the year. More details here.
Foreign tax credits Edit
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 (although now with the NIIT). 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 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.
Net Investment Income Tax Edit
If you have significant investment income or have a high salary, you may have noticed the new 3.8% surcharge that appeared last year on your US taxes.
The tax is curious since the way it was written, it wasn’t clear if this was a social security tax (in which case expats living in countries with Social Security Totalization Agreements wouldn’t need to pay), or an income tax, in which case you should be able to avoid double-taxation using foreign tax credits.
In the initial regulations, the IRS said that foreign tax credits would definitely not apply against this tax, since the tax is part of a new tax code. However, whether this is a social security tax wasn’t clear, since the social security agreements are a bit more broad.
Looks like the initial results are in, thanks to some courageous Canadian taxpayers:
Today I received notice from a practitioner that a taxpayer had taken the position, discussed in the article, that the NIIT was inapplicable, on the basis that he resided in a country with a social security totalization agreement (``SSTA``). The position was denied upon initial assessment (as expected). The taxpayer protested, and the IRS allowed the position - the NIIT was not chargeable. A victory!
This exclusion speaks only to the countries with which the United States has SSTAs. We don`t know whether the foreign tax credit approach will work.
Another caution: This is merely an assessment of one return - it is not a statement of policy by the IRS. Let`s see how other cases unfold.
News Flash: Further update January 20, 2014. A number of returns taking the SSTA approach have been accepted - some have "slid" through, and others have been denied, and were the subject of protest letters. So far, those protests have been accepted. Good news, so far, but again, it is not a statement of policy by the IRSSo if you are feeling lucky, perhaps give it a shot. Perhaps with Trump's hate of Obamacare, they'll get rid of this tax next year, but I wouldn't get my hopes up.
This is a very risky position to take, since at best your return will be initially rejected (“sliding through” isn’t going to happen anymore), and once you get a (probably annoyed) human looking at your return, you’d better be 100% there’s nothing else objectionable there. You also need to consider the cost of the audit/etc since you’ll probably be paying a professional to argue with the IRS, so if it’s only a couple hundred dollars, maybe it isn’t worth it.
Spanish company pension plans Edit
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. (If it's a broad based plan designed mainly for non-Americans, at least it avoids Section 409, which is a nasty bit of law that was passed after the Enron scandals.)
The Foreign Earned Income Exclusion Edit
This only worthwhile if you have a high income, the Beckham-tax rate, or get Employee Stock Awards, which are taxes at extremely low rates in Spain. This is because of the weird way the exclusion affects your taxes payable. Run it twice to see if it is really worthwhile.
I've heard that border guards have questioned people with Green Cards that use the Bona fide Residence Test. The key thing to note is that the a "bona fide residence" is not the same as your domicile/permanent home. From the IRS:
To see if you meet the test of bona fide residence in a foreign country, you must find out if you have established such a residence in a foreign country. Your bona fide residence is not necessarily the same as your domicile. Your domicile is your permanent home, the place to which you always return or intend to return.
It's somewhat debatable whether you can use Barcelona (the region) vs Barcelona the city for choosing your Housing Exclusion amount if you live in Sant Cugat. The safest thing to do would be to use the Spain (other) rate.
Remember if you claim the exclusion, you must reduce your foreign tax credit by the proportion of income you are excluding, since you cannot "double dip" and claim tax credits on income that you already excluded.
If you are married and both working, you can calculate the housing amount separately if you pay more rent than the housing exclusion allows.
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 Edit
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 recommend using the government's electronic EFTPS system.
Sending your tax return with a check on April 15th will most likely get you stuck with a late fee unless you send it by UPS or FedEx. Foreign certified mail doesn’t count.
If you are married to a Spanish person who is not a resident of the US, you may be able to file as "Single/Head of Household" if you have dependents that are not your wife.
Tax traps Edit
Careful about buying life-insurance or annuities in Spain. There is a 1% Federal Excise Tax on foreign insurance products. It's not entirely clear to me if the Spain/US tax treaty could be used to avoid this tax. Switzerland and the UK definitely have exemptions from this tax, so buy Swiss if you can. Alternatively, you can keep your American policy up-to-date. Most like it will be far cheaper than anything you can find here.
Generally stay away from non-US mutual funds/money market funds. PFIC rules are a bitch, and now with the new HIRE act, will be reportable even if you don't sell them.
If you do decide to buy foreign funds, talk to your tax advisor about segregating them in a QBU (Qualified Business Unit). This can allow you to avoid taking foreign exchange gains/losses until you take the money out of the account.
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.
Buying a house Edit
Owning a house has many of the same tax advantages as in the US. You get to deduct your mortgage interest and you get the same capital gains exemption on selling your primary residence as in the US.
However, there are several tricky issues:
If you take a loan in Euros to buy your house, and the Euro falls in value, you pay taxes on your "currency gain" on the repaid loan as ordinary income.
In addition, when you sell your home, you will have to convert to US dollars to calculate capital gains taxes. If the US dollar has dropped in value, you may owe much more in capital gains than you thought.
There's another 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.
There are ways to legally avoid these these issues, but they take careful tax planning and need to be set up before the home is purchased.
Filing as a non-resident Edit
If you only have a Green Card, you may be able to file as a non-resident by taking advantage of the tie-breaker residency test in the US/Spain tax treaty. You need to attach a 8833 form to your 1040NR to explain what you are doing.
Be aware of the fact that you may be putting your Green Card at risk if the US border guard decides to ask you about your taxes. In addition, you will run into problems applying for citizenship or a re-entry permit, since both forms ask you about filing as a non-resident.
Non-resident alien spouse Edit
If you are here because you married an non-US citizen (called non-resident alien by the US tax code), 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.