Retire in Spain: The Tax Implications for US Citizens

Question

I would love to retire in Spain but I’m a little confused about the tax implications. I’m American and my income is derived from bonds and stock dividends. If I live in Spain more than 181 days a year at what rate would I get taxed? Hypothetically examples:

  • 50k income
  • 150k income
  • 200k income
  • Etc.

Answers

These are the answers of Spainguru’s Facebook group members:

“Retire and income? Has to be passive.”

“You’ll be taxed in the US on your passive income, as always. You’ll be able to roll that tax into a tax credit in Spain (due to the reciprocal agreement).

In Spain, you’ll be able to deduct some 5100 EUR (I’d have to look up the exact amount). When all is said and done, depending on income, you won’t be paying much more – but you’ll get great value out of the quality of life (well worth it).

Make sure you’re in an area (such as Andalucia or Madrid) where the wealth tax has been nullified, else you’ll be taxed on your international holdings (not income – holdings). It’s a small tax, especially after taking the large exemption.”

“Hi. Thanks for responding. Because of the wealth tax, I would be paying a lot more…”

“As I said in my comment, the wealth tax was nullified in both Madrid and Andalucia (which includes the entire Costa Del Sol – Malaga, Marbella, Sotogrande, etc). You are, of course, free to think otherwise.”

“The government imposed a ‘solidarity’ tax in those regions that were previously exempt…”

“Yes, for the tax years 2022 and 2023. Anyone residing there now is no longer subject to the solidarity tax, unless it is once again extended. Granted, there is no knowing what new future legislation might come out of the government, which makes tax planning a gamble.

I’m in the same boat you are. In the end, I may have to rent closet space from a friend in Madrid and declare it my primary residence, with Marbella my vacation home.”

“Can you afford to pay taxes? If not then stay away.”

“I’m trying to get an idea of what my tax obligation would be. Your comment is not helpful to anyone.”

“To my knowledge, dividends are taxed at different rates in contrast to active income.”

“It’s not 181 days, it’s 183+ days.”

“We used a Tax Law Firm in Barcelona. And I agree this is your most reliable option even if it comes at paying some fees. As far as we were told, becoming a tax resident of Spain will impose a tax on your worldwide income, every category of it (even if you have no income in Spain).

Further, you will be subject to the Spanish Wealth Tax (except for some regions like Madrid which lower it to zero) and if you are from the US this will zap your IRAs, any 401Ks/403Ks, any US bank accounts, any brokerage account, any property you still own in the US.

Then there is the famous or infamous form 720 (which even in Madrid you have to complete and file) even though the EU Court of Justice made a ruling against its onerous penalties last year. Anyway, don’t rely on my post for tax advice, consult a tax attorney who will review your specific situation.”

Conclusion

Members highlighted several key points about the tax implications of retiring in Spain for US citizens. Spain has a reciprocal tax agreement with the US, allowing taxes paid in the US to be credited in Spain.

While dividends are taxed at different rates, becoming a tax resident in Spain subjects you to taxes on worldwide income and possibly the Spanish Wealth Tax, except in regions like Madrid and Andalucia where it is nullified or significantly reduced.

Consulting with a tax expert familiar with both US and Spanish tax law is highly recommended to navigate these complexities.