Thursday, March 18, 2010

Sources of tax advice for Americans in Spain

I'm a bit of a tax geek and have always prepared my taxes myself (except one year, and the tax preparer made a mistake and got us audited). Since both of us have a green card, it means that we need to file taxes in the US on our world (ie Spain) income. Since the US and Spain have a tax treaty, most Americans in Spain won't owe any US taxes (since rates here are higher), but you need to file anyway.

In the US system, there's a big difference between intentionally evading taxes and doing so by accident or ignorance. (The joke being that the difference is approximately five years in jail.) For this reason, elaborate structures designed to evade taxes are quite dangerous, because they show that the tax payer was obviously aware of the rules and tried to evade them. In contrast, someone like Tim "TurboTax ate my taxes" Geithner can become treasury secretary (which runs the IRS), despite "forgetting" to pay 32K in taxes because he claimed that TurboTax didn't to warn him he was making a mistake.

An extremely good resource for me has been an outfit called Offshore Press, which has a number of very well research e-books that approach the issue from the perspective of someone who wants to comply with the rules. They are not trying to sell some magic package that will hide your money from the IRS.

My conclusion so far:
  • Generally don't buy non-US mutual funds. US based funds are much more tax efficient and provide you with all the paperwork you need to file. The only exception are funds that qualify for Qualified Electing Fund treatment, and the only ones I've seen that do that are a couple Canadian funds.
  • Managed accounts (where you get the buy/sell records of each stock) and stocks are usually ok. Finding a broker that will deal with US persons is another matter.
  • Before you buy insurance or annuities, read about the 1% Federal Excise Tax. It appears that Spain has a tax treaty exemption for some kinds of insurance, but you need to file an 8833 form to claim this exception.
  • Foreign trusts, corporations, etc are generally more trouble than they are worth. It's unlikely to legally save you much in taxes, and if you want to just not pay, then it's better not to try too hard.
  • Variable annuities seem to be to only moderately attractive foreign investment (but be careful about the Excise Tax).
  • Buying non-US dollar bonds at a discount to face value can have unexpected tax implication.
  • Buying/selling any capital asset means paying capital gains on the cost/proceeds converted in US dollars. This includes houses, stocks, bonds, etc.
  • Tax advisers are a double edged sword: on one hand, if they give you an opinion and you rely on it and do something illegal, you generally avoid "intent" and won't go to jail. On the other hand, all your communications with the tax advisor can be subpoenaed by the IRS.
  • File your FBAR (separate from your return) if you have more than $10,000 in accounts outside the US. The penalties are extreme, even for non-willful omissions. The US has had access to the SWIFT system used for interbank transfers for years (in the name of fighting terror and drugs of course), so don't think you can keep a secret.
  • Try your best, but you will never be perfect. With 16,845 pages of the US tax code, you're probably breaking some rule.


Anonymous said...

Dear LostinSantCougat,
Can you recommend a basic strategy for someone coming from the US for retirement? That is, no earned Spanish income, just passive income from US assets.

Thank you,


santcugat said...

Assuming you are a US citizen, the US/Spain tax treaty has a clause that "pensions and other similar remuneration derived and beneficially owned by a
resident of a Contracting State in consideration of past employment shall be taxable only in that

So, for example, your 401k could be taxed only in the US. If this is a significant amount of income, talk to Spanish tax expert (I know a lot less about Spanish taxes than US)

Dividends and interest are taxed at a reasonable rate in Spain, so it would be unlikely you would owe much if anything in Spain.

You would be taxed on capital gains in Spain, but only to the amount that your assets have increased since the time of your sale.

The tax treaty ensure that you aren't taxed twice, but you will generally need to pay the maximum of either countries rate.

Remember also that Spain now has world-wide asset declaration for residents, so that can make it complicated if you don't declare an account and then later on want to make a transfer from it to a Spanish bank.

Anonymous said...

Thank you – this is very helpful. Do you have a view on the Spanish asset tax (patrimonio). I am not super wealthy, but I do have financial assets in the US in excess of the E1.4mm exclusion. Those are mostly interests in limited partnerships and simple brokerage accounts with mutual funds and public stock holdings. Is this something a local tax expert can structure around? I have no plans to bring any financial assets into Spain other than for the purchase of primary residence.


santcugat said...

Depends on where you move to, for example, Madrid and Valencia apply a 100% "bonus" to the tax that effectively eliminates it.

The thing that would worry me the most would be Spanish inheritence taxes, which are much much higher than the US ones. These apply even in the case of the death of a spouse.

You should also consider that your level of honest might be too high for Spanish standards and that you might be making your life too difficult. Unfortunately the experience of many people that try to do things by the book here is that they end up regretting it in the end, since many of the complex rules they try to follow were never really "debugged" since no on Spanish people actually bother with them. I mean, if even Rajoy is getting payments in cash...

Of course, the easiest thing would be just to get a US credit card that doesn't charge for foreign currency (like Capital One), do a one time transfer a modest amount of money from the US for day to day expenses and stay off the radar. Who is to say whether you spent more than 180 days a year here anyway? (it's a little harder if you have a job and family here)