Tax Tips For American Expats In Spain

If you're an American living in Spain, you may be enjoying the lifestyle and sunshine, but Uncle Sam hasn't forgotten about you. U.S. tax obligations don’t vanish when you cross the Atlantic. From foreign income exclusions to FBAR filings, this guide breaks down the most important U.S. tax rules every American expat in Spain needs to know in 2025 — and how to stay compliant while minimising your tax bill.

Yes, You Still Have to File U.S. Taxes

As a U.S. citizen or green card holder, your tax filing obligations follow you abroad. Even if you're a tax resident of Spain, you must file a federal tax return annually with the IRS — regardless of where your income is earned or taxed. The only way to break this obligation is to renounce your U.S. citizenship, which carries its own financial and legal consequences.

While most taxpayers file by April 15th, expats receive an automatic extension to June 15th. If needed, you can request a further extension to October 15th, but note: any tax owed is still due in April to avoid interest.

Who Must File?

If you earn more than $10,000 (single) or $400 from self-employment, you're required to file a federal return. These thresholds apply regardless of:

• Your physical location
• Whether you already pay tax in Spain
• The existence of a tax treaty between the U.S. and Spain

Key Tools to Reduce Your U.S. Tax Bill Abroad

Living abroad opens the door to several IRS provisions that help reduce or eliminate double taxation. But to benefit, you must file correctly and include the relevant forms.

1. Foreign Earned Income Exclusion (FEIE)

The FEIE lets you exclude up to $126,500 in earned income (2025 limit) from U.S. federal income tax. To claim this, file Form 2555 and qualify using either:

• The Bona Fide Residence Test: You’re officially resident in another country for a full calendar year and pay local taxes
• The Physical Presence Test: You spend 330 full days outside the U.S. in any 12-month period

Note: You must actively elect to use FEIE on your return. It only applies to income from work — not pensions, dividends, or capital gains.

2. Foreign Tax Credit (FTC)

If you pay income taxes to Spain, you may instead use the Foreign Tax Credit via Form 1116. This provides a dollar-for-dollar reduction on your U.S. tax liability for the same income.

This option is often better than FEIE if you have high foreign taxes or income types that don’t qualify under FEIE (e.g., passive income).

You cannot double-dip. Income excluded via FEIE cannot also be used for the FTC. Choosing the best path depends on your income structure, country tax rate, and whether you plan to carry over unused credits.

3. Foreign Housing Exclusion

If you qualify for FEIE, you may also claim housing expenses such as rent, utilities, or insurance premiums abroad. The cap varies by city, and Madrid and Barcelona typically qualify for higher limits due to cost-of-living adjustments.

What About State Taxes?

Even if you no longer live in the U.S., some states may still consider you a resident for tax purposes — especially if you maintain property, a driver's license, voter registration, or bank accounts there. California, New Mexico, Virginia, and South Carolina are particularly aggressive.

If you're moving abroad permanently, it's wise to formally sever state ties by documenting your departure and changing your legal residence.

Do Spain and the U.S. Have a Tax Treaty?

Yes — Spain and the U.S. signed a bilateral tax treaty to reduce double taxation. However, it does not eliminate your U.S. filing requirements. Instead, it may help clarify residency status or avoid withholding on pensions, dividends, and royalties.

To take advantage of treaty benefits, you may need to submit Form 8833 and be familiar with specific treaty articles. U.S. citizens typically rely on FEIE or FTC for tax relief rather than treaty claims.

Social Security: Who Gets What?

Thanks to the U.S.-Spain Totalization Agreement, Americans working in Spain typically only pay into one country's Social Security system — not both. If you're employed by a Spanish company, you pay into the Spanish system and can later claim Spanish retirement benefits. Self-employed expats may need to apply for a Certificate of Coverage to remain under U.S. Social Security.

FBAR: The $10,000 Trigger You Can’t Ignore

If your combined foreign bank and investment accounts exceed $10,000 at any point during the tax year, you must file a Foreign Bank Account Report (FBAR) via FinCEN Form 114.

This is separate from your tax return and carries serious penalties if ignored — up to $10,000 per violation (or more for willful neglect). This applies even if the accounts are dormant, jointly owned, or held in trusts.

Late to File? Use the Streamlined Procedure

If you've missed past returns or FBARs, the IRS offers a Streamlined Filing Compliance Procedure to help you catch up penalty-free. You’ll need to:

• File the last 3 years of U.S. tax returns
• Submit 6 years of FBARs
• Certify that your non-compliance was non-willful

Modelo 720: Spain’s Own Reporting Requirement

Spain also requires residents to declare foreign-held assets worth over €50,000 using Modelo 720. Failure to comply can lead to extremely harsh penalties — although the European Court of Justice has forced Spain to moderate enforcement in recent years.

Still, it’s vital to report foreign assets properly to avoid scrutiny from Spanish tax authorities.

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Sources:

IRS - Taxpayers Living Abroad

FinCEN - Report of Foreign Bank and Financial Accounts

IRS - About Form 2555

IRS - About Form 1116

IRS - Streamlined Filing Compliance Procedures

Agencia Tributaria - Spain’s Tax Agency