Sponsored by Wicklow Expat Tax Advisors.
Image courtesy of Ajuntament de Barcelona.
Wicklow Expat Tax founder Thomas Sneed CPA, CFA has been helping fellow Americans living in Spain file their US taxes for over 10 years.
That Barcelona was recently ranked one of the best cities in the world to live in is no surprise to the growing number of Americans living and relocating here. Combining world-class architecture, cuisine and culture, with a clement climate, and with beaches and mountains just outside, it’s no surprise that Barcelona is a magnet for Americans wanting to experience life in Europe. However, living abroad means navigating the complexities of US taxes as well as local laws. In this article, we provide some essential tax tips to help Americans living in Barcelona stay compliant and minimize their US tax liabilities.
1. Understand US Filing Rules for Americans Living Abroad
The US tax system differs from that of many other countries, as it requires all Americans to report their worldwide income annually, regardless of their residency status. This means that even if you live in Barcelona, Spain, you are still obligated to file a US tax return each year, disclosing both your US and any international income. This requirement applies regardless of whether you are also filing or paying taxes in Spain. Fortunately, Americans living in Barcelona are granted additional time to file their taxes, with an automatic extension until June 15th. If one needs more time after June 15th, one can request a further extension until October 15th by submitting Form 4868. Understanding these filing rules is essential to ensure you comply with US tax laws while living abroad in Barcelona.
2. Utilize the Foreign Earned Income Exclusion
Expats can take advantage of the Foreign Earned Income Exclusion (FEIE) to reduce their US tax liability. If you meet the requirements of either the Physical Presence Test (essentially meaning you spend at least 330 full days outside the US in a 365 day period) or the Bona Fide Residence Test (meaning you can demonstrate your residence in another country), you can exclude a certain amount of your foreign earned income from US taxation. For tax year 2023, the exclusion amount is $120,000 per person ($126,500 for 2024). By qualifying for the FEIE, you can potentially eliminate or minimize your US federal income tax liability on earned income in Barcelona.
3. Consider the Foreign Tax Credit
While the FEIE is beneficial for excluding earned income (e.g. salary income) from US taxation, it doesn’t cover all types of income to mitigate US tax liabilities. In cases where you pay foreign (e.g. Spanish) taxes on your income, you can utilize the Foreign Tax Credit to offset your US tax liability.
By filing IRS Form 1116, you can claim Foreign tax credits equal to the amount US tax owed. This often allows Americans living in Barcelona to eliminate their US tax liabilities completely.
4. Understand State Tax Obligations:
In addition to US federal taxes and Spanish taxes (if you qualify as a Spanish tax resident), Americans living in Barcelona may have state tax obligations if they earn income from sources in that state such as rental property or from a business with a permanent establishment in that state. Generally speaking, a US citizen living in Spain, without the above income sources, does not have to file a state tax return because they are no longer resident there.
Certain states such as California are aggressive in trying to require ex-residents to continue filing and paying California taxes. Important factors that may lead a state to ask for a tax return can include retaining property, renewing a state drivers license, dependents, financial accounts, or other significant ties in your former state, spending extended periods there during the year, or intending to return to live there again in the future. Understanding these factors in the last state where you lived is essential for expats to determine their state tax obligations while residing in Barcelona.
5. Get up to Date If You’re Behind
If you’re already residing in Barcelona but were not aware of your US tax filing obligations, it’s crucial to catch up before facing potential penalties from the IRS. With enforced information sharing due to the Foreign Account Tax Compliance Act (FATCA), the IRS now has access to expats' financial data abroad, including foreign banking information. To avoid repercussions, expats who haven’t been filing from abroad can take advantage of the Streamlined Procedure, an amnesty program that allows them to catch up on missed filings without penalties, provided they do so before the IRS initiates contact.
6. Fulfill Other Reporting Requirements for Expats in Barcelona
Living in Barcelona, Americans abroad must adhere to additional reporting obligations concerning their foreign bank accounts, investments and business ventures.
One essential requirement is filing the FBAR (Foreign Bank Account Report), applicable to any American holding over $10,000 in total across their foreign financial accounts at any time during the year. This includes non-US bank, investment and individual pension accounts, along with joint and business accounts where you hold signatory authority.
7. Seek Professional Advice
To ensure compliance and maximize tax benefits, consider seeking professional advice from a tax professional with expertise in international taxation for expats. A qualified, experienced professional will help you understand your tax obligations, optimize tax-saving strategies and work through any challenges or uncertainties that arise.
If you require assistance with your US taxes, find out more and contact Wicklow Expat Tax Services at wicklowexpattax.com.
Sponsored by Wicklow Expat Tax Advisors.
Disclaimer: The information provided on this website does not and is not intended to, constitute legal advice; instead, all information available on this site is for general informational purposes only. Laws are subject to change and do so regularly. While the Barcelona Metropolitan endeavors to ensure that the content is accurate and up-to-date, users should seek appropriate legal advice before taking or refraining from taking any action based on the content of the website or otherwise.