Imagine this scenario: You’ve moved to Spain from the US and are excited about your new life abroad. Then, tax season hits, and you realize you have no idea how Spanish taxes work compared to the US. Panic sets in as you worry about missing deadlines, overpaying, or facing hefty fines for non-compliance. Understanding the differences between Spain’s taxes vs the US is crucial to avoid these stressful situations.
This is going to be useful to anyone moving to Spain on a non-lucrative visa or golden visa. It is possible to save on Spanish taxes Spain by utilising the Spain Beckham Law.
Before moving, ensure you understand the 7 biggest mistakes that people make when moving to Spain, which you need to avoid.
Did you know that your US ROTH IRA will be subject to Spanish income tax?
Spain Vs USA Taxes & Rates
When comparing taxes in Spain vs USA, it’s important to understand that the two countries have vastly different systems, rates, and regulations. In Spain, residents are taxed on their worldwide income, while in the US, citizens and residents are also charged on global income, regardless of where they live. This means Americans living in Spain must navigate both systems, potentially leading to double taxation if not appropriately managed.
The tax rates in Spain can be quite different from those in the US. Spain has a progressive system with rates ranging from 19% to 47% for individuals. In contrast, the US federal income tax rates range from 10% to 37%, with additional state taxes varying significantly. This can result in higher overall burdens for high earners in Spain compared to the US.
Tax Residency status
Understanding tax residency is another critical aspect. In Spain, you are considered a resident if you spend more than 183 days in the country within a calendar year or if your primary economic interests are in Spain. This contrasts with the US, where residency is based on physical presence or having a green card. Knowing your residency status is essential to comply with both countries’ laws.
Differences between the United States & Spain
Another key difference is the treatment of capital gains and investments. Spain taxes capital gains at rates between 19% and 23%, depending on the amount, whereas the US capital gains at 0%, 15%, or 20%, depending on income levels. Additionally, the US has favourable treatments for certain types of investments like 401(k) plans and IRAs, which may not have direct equivalents in Spain.
Social security taxes also differ significantly. In Spain, employers and employees contribute to social security, with total contributions of around 30% of an employee’s salary. In the US, social security rates are lower, but additional Medicare taxes are needed. Americans working in Spain need to understand these contributions to avoid surprises in their paychecks.
For expats, navigating these differences is crucial. Spain and the US have treaties to prevent double taxation, but these treaties are complex and require careful planning. Filing requirements can be stringent, with Spain requiring annual returns by June 30 and the US by April 15, with possible extensions.
Deductions & credits
Managing tax compliance in both countries involves understanding deductions and credits. In Spain, residents can benefit from deductions for mortgage interest, contributions to Spanish pension plans, and donations. The US offers deductions for mortgage interest, charitable contributions, and state and local taxes, but these are subject to different rules and limits.
Owning Spanish property as an American
It’s also important to consider the implications of property ownership. In Spain, property owners pay annual property taxes (IBI) and additional charges when buying or selling property. In the US, property taxes vary by state, and there are capital gains taxes on the sale of property, with specific exemptions for primary residences.
You will need to understand how the rental income from your property investments in Spain is taxed. If you are not living in Spain, a 24% Spanish tax rate is based on the gross rental income. In addition, you need to think about how the Internal Revenue Service (IRS) will tax you on this same rental income.
It’s wise to seek advice from professionals familiar with both systems to avoid pitfalls. They can help plan, ensure compliance, and optimize tax liabilities. Using professionals can save you from costly mistakes and ensure that you’re taking advantage of all available benefits and deductions.
It would be beneficial for you to book a call with Simon Misiewicz, our international tax expert, to learn how to avoid the mistakes many Americans make when moving to Spain. You will need to obtain the NIE tax ID in order to file a Spanish tax return.
US and Spanish Estate & Inheritance Tax?
Another area of tax that Americans need to consider is the Spanish Inheritance Tax on American inherited assets.
What are the main tax differences?
The main differences include rates, residency rules, and the treatment of income and investments. Spain has higher progressive rates and different residency rules than the US.
How are capital gains taxed in Spain vs USA?
In Spain, capital gains are taxed between 19% and 23%, while in the US, they are taxed at 0%, 15%, or 20% depending on income levels. The US also has specific advantages for certain retirement accounts that may not exist in Spain.
What is the significance of residency in Spain & the United States?
Residency determines which country taxes your worldwide income. In Spain, you are a resident if you spend more than 183 days a year there or have economic ties. In the US, residency is based on physical presence or having a green card.
How do social security taxed?
Social security contributions are higher in Spain, with employers and employees contributing around 30% of their salary. In the US, social security tax rates are lower, but additional Medicare taxes exist.
What should expats consider?
Expats should understand the treaties to avoid double taxation, be aware of filing deadlines, and seek professional advice to navigate the complex systems of both countries. Proper planning is essential for compliance and optimizing liabilities.
