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Tax Guide for Spanish Expats in the U.S.

Tax Guide for Spanish Expats in the U.S.
Ines Zemelman, EA
22 September 2021

You probably have many queries if you're thinking of moving from Spain to the United States. Will you, for example, pay income tax in the United States, and if so, how much? What forms do you need to submit? What will the Internal Revenue Service (IRS) think of your Spanish assets, especially your pension fund? 

Check out this U.S. tax guide for aliens to learn more about U.S. taxes for foreign nationals, immigrant and nonimmigrant status and other key tax concerns that Spanish expats should be aware of in the United States to make your transition go more seamlessly.

When am I considered a U.S. tax resident for tax purposes (ie how many days in us to be a US tax resident)?

What does it mean to be a resident of the United States for the purposes of taxation?

Unless a foreign citizen qualifies as a resident, they are considered as a non-resident for tax purposes in the United States. A resident in the United States is either a lawful permanent resident or passes the substantial presence test.

A lawful permanent resident is someone who has been granted legal permission to live in the United States indefinitely. Green card holders are the term used to describe these people.

If you meet the substantial presence test for the calendar year, you will be declared a U.S. resident for tax purposes. You must be present physically in the United States on at least one of the following to pass this test:

  • 31 days during the current year, and
  • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
  • All the days you were present in the current year, and
  • 1/3 of the days you were present in the first year before the current year, and
  • 1/6 of the days you were present in the second year before the current year.

During the same tax year, an individual might be both a nonresident and a resident at various periods. This can happen in the year when a foreign citizen enters or leaves the United States. Residence starts on the first day of the calendar year. The individual is physically present in the United States as a lawful permanent resident and concludes that the lawful permanent resident status formally terminates for an individual who solely meets the green card test.

The first day of the year in which the individual is physically present in the United States is considered the first day of residence under the significant presence requirement. If certain circumstances are satisfied, an individual's status as a resident ends after their last day of physical presence in the United States.

When it comes to residence start and end dates, is there a de minimis number of days rule? For example, after their engagements expire and repatriate, taxpayers cannot return to the host country/jurisdiction for more than 10 days.

To determine an individual's residency start and end dates, up to 10 days of presence in the United States will not be counted; nevertheless, those days of presence will be calculated for assessing whether the 183-day component of the important presence requirement has been met.

But what if the assignee arrives in the country/jurisdiction before the start of their project?

The residence start date is regarded as the first day of the visit. The individual's cumulative presence for the year exceeds 10 days if the taxpayer has many brief visits to the United States before establishing residency. Suppose the individual has a tax home in a foreign country or jurisdiction and a closer connection to the foreign country or jurisdiction during those days. In that case, an individual may be present in the United States for a total of 10 days. The purpose of a visit to the United States has no bearing on whether or not a person is a U.S. resident or on calculating the start date of residency. The residence is determined by presence rather than purpose under the requirements of the significant presence test.

Do non-U.S. citizens pay taxes?

Residents of the United States are typically taxed on their worldwide compensation, regardless of where or for whom they provide services. Cash payment and the fair market value of property or services received are included in salary. Foreign earned income of a citizen or resident for services done in a country/jurisdiction other than the United States may be subject to notable exclusions.

When it comes to U.S. non-resident tax, nonresidents are taxed in the United States on income earned in the United States. Unless a treaty allows for a lower rate, US-source income that is not effectively connected with a U.S. trade or business—usually investment income—is taxed on a gross basis at a flat 30% rate. A nonresident who engages in a work or business in the United States during the taxable year is taxed at the same graduated rates as citizens and residents on the income effectively associated with the U.S. trade or company, less permitted deductions. Compensation for personal services provided in the United States is often included in income effectively related to a U.S. trade or company.

A dual-status taxpayer—a foreign national who switches from U.S. resident to nonresident status or vice versa during the year—is subject to U.S. tax as if the year were divided into two periods: one of residence and the other non-residence. For the period of residency, the dual-status foreign national is taxed on worldwide income, and only on US-source income for non-residence.

If a non-resident is in the United States for 90 days or less in a calendar year, provides services for a foreign employer who is not engaged in a U.S. trade or business, and receives 3,000 USD or less for such U.S. services, the pay is considered the foreign source and is not subject to U.S. tax. Most treaties offer more extensive exemptions from U.S. tax on earned income, providing a higher, or no, restriction if the nonresident is present in the U.S. for no more than 183 days in 12 months and meets specified criteria.

The federal income tax rate varies between 10% and 37%.

The U.S. – Spain Tax Treaty

The tax treaty between the United States and Spain was formed in 1990. A supplementary protocol was negotiated in 2013 but only ratified in 2019 that decreased withholding taxes on profits, interest, and royalties while also improving tax information exchange between the two countries. The treaty aims to avoid double taxation on Americans residing in Spain and Spaniards living in the United States. However, the treaty does not exempt American expats living in Spain from filing U.S. taxes.

For more details on which countries have treaties with the United States, see IRS Publication 515, Withholding of Tax on Nonresident Aliens & Foreign Entities.

IRS regulations mandate that foreign nationals must have either a Social Security Number (SSN) or an Individual Taxpayer Identification Number (ITIN) to receive any tax treaty benefits.

Nonresident and resident aliens must follow specific regulations when filing an income tax return with the IRS. For further information, see IRS Publication 519, U.S. Tax Guide for Aliens.

Ines Zemelman, EA
Founder of TFX